2019 May (AD/AS Deflationary Gap) Paper 1 HL
3. (a) Explain how a deflationary gap might occur.
Definition
Deflationary Gap – when the AD curve shifts left of full employment also called a recessionary gap. Actual output is below the full employment output level due to a decrease in AD. Price Level (PL) has decreased.
Diagram
Explanation
As consumer confidence in the economy falls consumers decide to spend less money on goods and serves causing AD to shift left below the full employment output level, PL decreases and output decreases and the economy to fall into a recession or a deflationary gap.
To fix a deflationary gap the appropriate Fiscal Policy would be to increase (Gs) government spending or decrease taxes causing consumers to have more income and therefore spend more increasing consumption and shofting aggregate demand back toward full employment. Monetary policy can correct a deflationary gap by inreasing the money supply causing the AD curve to shift to the right back toward full employment.
No comments:
Post a Comment