question_answer

                                                     

What is meant by inflationary gap? State three measures to reduce this gap.

Or

What is meant by aggregate demand? State is I components.

Answer:

An inflationary gap, in economics, is the amount by which the actual gross domestic product exceeds potential full-employment GDP. It is one type of output gap, the other being a recessionary gap.

Three measures to reduce this gap are:

1. Fiscal Policy: Fiscal policy is the expenditure and revenue (taxation) policy of the government to accomplish the desired objectives.

In case of excess demand (when current demand is more than agree gate supply at full employment), the objective of fiscal policy is to reduce agree gate demand.

2. Monetary Policy (Raise bank rate and CRR): Monetary policy of the central bank of a country to control money supply and credit in the economy. Therefore, it is also called Central Banks Credit Control Policy. Money broadly refers to currency notes and coins whereas credit generally means loans, i.e., finance provided to others at a certain rate of interest. Monetary measures (instruments) affect the cost of credit (i.e., rate of interest) and availability of credit. Thus, it helps in checking excess demand when credit availability is restricted and credit is made costlier.

3. Miscellaneous: Other anti-inflationary measures are import promotion, wage freeze, control and blocking of liquid assets, compulsory savings scheme for households, increase in production by utilising idle capacities, etc.

Or

Aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amount of goods and services that will be purchased at all possible price levels.

Components of aggregate demand

\[AD=C+1+G+(x+m)\]

1. Consumption

2. Investment

3. Government Spending

4. Net Export

1. Consumption: This is made by households, and sometimes consumption accounts for the larger portion of aggregate demand. An increase in consumption shifts the AD curve to the right.

2. Investment: Investment, second of the four components of aggregate demand, is spending by firms on capital, not households. However, investment is also the most volatile component of AD. An increase in investment shifts AD to the right in the short run and helps improve the quality and quantity of factors of production in the long run.

3. Government: Government spending forms a large total of aggregate demand, and an increase in government spending shifts aggregate demand to the right. This spending is categorized into transfer payments and capital spending. Transfer payments include pensions and unemployment benefits and capital spending is on things like roads, schools and hospitals. Governments spend to increase the consumption of health services, education and to re-distribute income. They may also spend to increase aggregate demand.

4. Net Exports: Imports are foreign goods bought by consumers domestically, and exports are domestic goods bought abroad. Net exports is the difference between exports and imports, and this component can be net imports too, if imports are greater than exports. An increase in net exports shifts aggregate demand to the right. The exchange rate and trade policy affects net exports.