Deficient Demand & Deflationary Gap
Meaning:
When in an economy aggregate demand falls short of aggregate supply at full employment’, the demand is said to be a deficient demand, and the difference is called deflationary gap.
Deflationary gap:
It is a measure of amount of deficiency in aggregate demand. Thus, deflationary gap is synonym of deficient demand.
Deflationary gap has been illustrated in Fig. Here, point E lying on 45° line is the full employment equilibrium point. This is an ideal situation.
Meaning:
When in an economy aggregate demand falls short of aggregate supply at full employment’, the demand is said to be a deficient demand, and the difference is called deflationary gap.
Deflationary gap:
It is a measure of amount of deficiency in aggregate demand. Thus, deflationary gap is synonym of deficient demand.
Deflationary gap has been illustrated in Fig. Here, point E lying on 45° line is the full employment equilibrium point. This is an ideal situation.
Suppose, the actual demand is for a level of output OM; (E1M1) which is less than full employment level of aggregate supply OM (or EM). The difference between the two, i.e., the actual aggregate demand E1M1 (or OM1) and aggregate supply at full employment EM (or OM) is EB which is a measure of deflationary gap or deficient demand. Mind, E1 is the under-employment equilibrium point.
Impact:
(i) Deficient demand leads to fall in prices which in turn lead to fall in level of income, output and employment
(ii) A persistent fall in deficient demand leads to state of depression in the economy.
Impact:
(i) Deficient demand leads to fall in prices which in turn lead to fall in level of income, output and employment
(ii) A persistent fall in deficient demand leads to state of depression in the economy.
