Inflationary gap refers to a situation when the actual aggregate demand exceeds the aggregate demand required to maintain full employment level.
Two fiscal measures to correct the inflationary gap are mentioned below:
a. A reduction if the expenditure by the government.
b. Increase in the level of taxes.
In the above figure, AD is the aggregate demand. The equilibrium is attained at point T. D is the actual aggregate demand level. It exceeds AD by ET. Et is called the inflationary gap.
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