Learn effective measures to remove the deflationary gap and stimulate economic growth. Implement fiscal and monetary policies to combat deflation.
Measures to Remove Deflationary Gap.
- The consumers should increase the consumption expenditure In this respect, they should be provided subsidies or tax exemptions, etc.
- The investors should increase the investment expenditures In this connection they should be provided subsidies or tax exemptions, etc.
- In the presence of government, it should increase its expenditures through printing of new notes or borrowing from bank and non bank sources.
- The central bank should lower the bond rate. In this way, the commercial banks will also decrease the interest rate. Accordingly, the investment activities will be encouraged.
Then by adopting the fiscal and monetary measures, the AD in the economy can be raised.
Inflationary Gap
If at the level of full employment,- AD > AS the inflationary gap develops. It occurs because of increased expenditures which result in excess demand in the economy The producers earn extraordinary profits when the demand for their goods and services increases They respond by enhancing the investment expenditures.
Measures to Remove Inflationary Gap:
- The consumers decrease the consumption expenditures. In this respect, subsidies and tax exemptions be withdrawn.
- The investment expenditures be decreased. In this connection, investors be taxed etc.
- The government expenditures should be decreased (if there is government)
- The central bank should increase the bank rate, the commercial banks will also increase the interest rate. Accordingly, the investment activities will be discourage.
Thus by adopting fiscal and monetary measures, the AD in the economy can be curtailed. When AD comes down, the AD curve will pass through the point F (in Fig) where there is full employment.