Deflationary gap
A deflationary gap is a shortfall of aggregate demand relative to the spending required to support full-employment output in a simplified macroeconomic model. It can leave resources underused and put downward pressure on inflation. It does not require the actual price level to fall, and the expenditure gap is not necessarily equal to the resulting output gap.
Worked example
In a simple model, spending is too low to support full-employment production. Additional demand could increase output while spare capacity remains, but its effect depends on supply constraints and multiplier assumptions.
Common mistake
Equating a deflationary gap with observed deflation, or confusing a spending shortfall with the total change in national output.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | BT | Supporting | September 2026–June 2027 |
| FIA | FBT | Supporting | September 2026–June 2027 |