Answer :

The gap by which the aggregate demand falls short of aggregate supply at the full employment level is called a deflationary gap.

The two fiscal measures which can be used to correct the deflationary gap are-

a. Reduction in taxes- When there is deficient demand, the government can reduce the rate of different taxes and can even eliminate some of them. It will increase the purchasing power of the people. Now they will have more disposable income, which can be used to spend on consumption or investment. This will increase the level of aggregate demand. This is also called the revenue policy,


b. Increase in public expenditure- the government can invest in Public Work such as constructing roads, flyover, buildings, etc. This will provide more income to the people which can be used for consumption and investment. This will increase the level of aggregate demand.

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