The difference between the inflationary gap and the deflationary gap can be understood easily with the help of the points given below:. The determinants behind deflationary gap are: fall in the propensity to consume, resulting in the decrease in the consumption of the households, fall in government expenditure, decrease in export demand due to global recession, fall in credit facilities leading to decrease in the demand for private investment, decrease in disposable income, decrease in investment due to financial crisis or banking collapse.
In the case of the inflationary gap the general price level increases, but the same will decrease in the deflationary gap. When there is an inflationary gap the level of output is constant, whereas there is a low level of output in case of a deflationary gap. Deflationary gap results in the reduction in the level of investment, which may result in involuntary unemployment, because of the decrease in planned output.
As against, in case of the inflationary gap, there is no effect on employment. As a corrective measure, the government can take resort to expansionary fiscal policy to overcome the deflationary gap, whereas to cope with an inflationary gap, contractionary fiscal policy can be used by the Government.
Quick Comparison: Inflationary Vs Deflationary Gap Basis Inflationary Gap Deflationary Gap Concept Inflationary Gap reflects the excess of aggregate demand, than the level of demand required to enable full employment equilibrium, in the country's economy.
Deflationary Gap indicates the shortage of aggregate demand than the level of demand required to enable full employment equilibrium in the country's economy.
Fall in the propensity to consume, resulting in a decrease in the consumption of the households. Rise in government expenditure. Fall in government expenditure. Increase in export demand. Decrease in export demand, due to the global recession. Rise in credit facilities leading to an increase in the demand for private investment.
Fall in credit facilities, leading to a decrease in the demand for private investment. Increase in disposable income The decrease in disposable income. Thus there is divergence between the point of equilibrium attained by an economy and the point of equilibrium at which an economy has full employment of resources.
This is the basic difference between Classical Theory and Keynesian Theory. In fact, aggregate demand in the economy is the driving force that determines the level of output, employment and income.
It is because the level of aggregate supply is constant during short period. If aggregate demand increases, level of output will increase to meet the increased demand. As a result, employment and income will also rise. Thus increase in demand has led to increase in output, employment and income. This is the gist of Keynesian or Macro approach. The scope of this chapter is limited to Keynesian Theory.
The core issue of macroeconomics is the determination of level of income, employment and output. It needs to be noted that Keynesian theory is supposed to apply under short run and perfect competition. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. What Is an Inflationary Gap? Key Takeaways An inflationary gap measures the difference between the current level of real GDP and the GDP that would exist if an economy was operating at full employment.
Policies that can reduce an inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
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Real gross domestic product real GDP is an inflation-adjusted measure of the value of all goods and services produced in an economy. Above Full Employment Equilibrium Definition Above full employment equilibrium refers to an economy operating at a level where its real GDP temporarily outstrips its potential level.
What Are Government Purchases? Government purchases are expenditures by federal, state, and local governments, which combined are a key factor in determining GDP. What Is a Production Gap? A production gap is an economic analytical term denoting the difference between actual industrial production from its perceived potential production.
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