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Dear tutor,
Could you please kindly explain the below questions?
1. What is the inflationary gap?
2. What is the deflationary gap?
3. Why could a budget deficit be the best way to address a deflationary gap?An inflationary gap, is the amount by which the gross domestic product exceeds potential full-employment GDP. Competition for labour pushes up wages.
A deflationary gap is when more labour and products are available than needed. Prices then suffer downward pressure.
A budget deficit implies the government is borrowing. When it spends that money, demand increases and deflationary pressures and the deflationary gap are reduced.
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