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CA Foundation · Business Economics · Determination of National Income

According to the Keynesian theory, what does the 'inflationary gap' measure?

The inflationary gap is the amount by which aggregate demand exceeds the full-employment level of output. Since real output cannot rise beyond full employment, the excess demand pushes up the general price level. A shortfall of demand is instead called a deflationary gap.

  1. AExcess of aggregate demand over the output level corresponding to full employmentCorrect
  2. BShortfall of aggregate demand below the full-employment output
  3. CExcess of exports over imports at full employment
  4. DExcess of government revenue over government expenditure

Explanation

An inflationary gap arises when aggregate demand at full-employment income exceeds the full-employment output, so that prices are pushed up since real output cannot expand. The shortfall of demand below full-employment output is a deflationary gap, which is the opposite situation.

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