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What is meant by inflationary gap? State three measures to reduce the gap.
                                                      OR
What is meant by aggregate demand? State its components.

Dear Student,

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 (AD E )and the full employment level of output (AD F ). Algebraically, 

Inflationary gap can be corrected by:

1. Raising the tax rates

2. Raising the bank rate

3. Increase in investment expenditure 

OR

Aggregate demand is the sum total of expenditure that the people plan to incur on the purchase of goods and services produced in the economy corresponding to their different levels of income. 
Expenditure on goods and services in broadly classified as:
1. Consumption Expenditure and
2. Investment Expenditure.
Accordingly, AD may also be defined as the sum total of Consumption Expenditure and Investment Expenditure that the people wish to make corresponding to different levels of income in the economy.

​​​​​​ Components of AD:
A two-sector closed economy includes:
1. Household Sector- measures the demand for consumer goods (C)  and
2. Producer Sector- measures the demand for such producer goods which lead to capital formation (I)

  Thus,
            AD (Aggregate Demand) = C  (Household Consumption Expenditure) + I (Producers investment expenditure)

Regards​​​​  

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Explain inflationary gap with diagram if possible and then its measures either monetary or fiscal measures..... in the second part we have to write aggregate demand definition and then its component consumption expenditure investment expenditure government expenditure and net export
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Inflationary gap refers to the difference between AD in excess of full employement and AD corresponding to full employement .
The three measures to reduce the gap are:
> Government expenditure decreases there fore money supply decreases hence AD decreases
> Taxes are increased therefore money supply decreases hence AD decreases.
>  Government increases deficit financing therefore money supply decreases hence AD decreases.

Q2. Aggregate demand refers to the  aggregate expenditure or planned expenditure on domestically produced goods and services by the people during an accounting year. 
AD has 4 components
> C - Private consumption expenditure
        it is done by the household on domestically produced goods and services during an accounting year
        it depends on personal disposable income
               if PDi increases > C increases
               if PDi decreases > C decreases

> I - Private investment expenditure
        it is done by the private producers on capital goods to increase the stock of capital
        it depends on market rate of interest
              if rate increases > investment decreases
              if rate decreases > investment increases

>G - government expenditure
      1. government consumption expenditure
 when government makes expenditure on consumption goods for collective consumption
    2. government investment expenditure
when government makes expenditure on infrastructure development

>Net exports
refers to the difference between exports and imports 
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