In an economy, when is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap. (Choose the correct option to fill in the blank)
In an economy, when is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap. (Choose the correct option to fill in the blank)
Options
Correct option: (A) ex-ante Aggregate Demand.
A deflationary gap is the amount by which the planned (ex-ante) aggregate demand falls short of the aggregate demand required to achieve full-employment level of output.
Marking Scheme
- 11 mark for selecting option (A) — objective type question, no partial credit.
Hint
Deflationary gap = shortfall of planned (ex-ante), not actual (ex-post), aggregate demand relative to the full-employment requirement.
Quick Oral Answer
A deflationary gap is the shortfall of planned (ex-ante) aggregate demand below the level required to achieve full-employment output.
Analysis & Explanation
This tests the concept of deficient demand and the deflationary gap from income determination theory.
Why (A) is correct
- A deflationary gap arises when the ex-ante (planned/intended) aggregate demand at the current equilibrium is less than the aggregate demand needed to sustain full-employment output.
- The word 'ex-ante' is key — it refers to planned demand before actual transactions occur, which is what firms use to decide output and employment levels.
Why the others are wrong
- (B) ex-post Aggregate Demand — 'ex-post' refers to actual/realised demand after the event, which by definition always equals actual output (an accounting identity), so it cannot be 'insufficient' in this sense.
- (C) and (D) refer to Aggregate Supply, not Aggregate Demand — the deflationary gap is specifically a demand-side shortfall, not a supply concept.
Common Mistakes
- 1Confusing 'ex-ante' (planned, before the event) with 'ex-post' (realised, after the event) — the gap concept applies specifically to planned/ex-ante demand.
- 2Mixing up aggregate demand and aggregate supply gaps — deflationary/inflationary gaps are demand-side concepts in the basic Keynesian income-determination model.
Interesting Facts
A deflationary gap is closed by an expansionary fiscal or monetary policy that boosts aggregate demand — for instance, tax cuts or increased government spending.
The deflationary gap concept comes directly from Keynesian economics developed during the Great Depression of the 1930s, when demand deficiency caused mass unemployment.
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Frequently Asked Questions
What is a deflationary gap?
A deflationary gap is the amount by which the ex-ante (planned) aggregate demand at the current equilibrium falls short of the aggregate demand required to achieve full-employment level of output, leading to unemployment and deficient demand.
How can a government correct a deflationary gap?
A deflationary gap can be corrected through expansionary fiscal policy (increased government spending, tax cuts) or expansionary monetary policy (lower interest rates, increased money supply) to boost aggregate demand.