distinguish between inflationary gap and deflationary gap state two measures by which these can be corrected - Economics - Open Economy Macroeconomics

Question

distinguish between inflationary gap and deflationary gap state
two measures by which these can be corrected?

Shvetika Sharma · Accepted Answer

Inflationary gap: In the situation of excess demand, i e when the actual aggregate demand for output is above the full employment level of output there arises a tendency for the prices to rise This is because the production cannot be increased beyond the full employment level of output and thereby, leads to inflationary gap This gap is the difference between the actual aggregate demand (ADE)and the full employment level of output (ADF) Algebraically, $({A D}_{E} - {A D}_{F}) \Rightarrow I n f l a t i o n a r y g a p$ Inflationary gap can be corrected by: 1 Raising the tax rates 2 Raising the bank rate Deflationary gap: In the situation of deficit demand, i e when the actual aggregate demand for output is less than the full employment level of output, there arises a tendency for the price and the output level to fall This is because due to deficit demand producers experience piling up of unsold stock of goods and therefore tend to reduce the output and the price level This leads to deflationary gap This gap is the difference between the full employment level of output and the actual aggregate demand for output Algebraically, $({A D}_{F} - {A D}_{E}) \Rightarrow D e f l a t i o n a r y g a p$ Deflationary gap can be corrected by: 1 Reducing the tax rates 2 Reducing the bank rate

distinguish between inflationary gap and deflationary gap.state two measures by which these can be corrected?