Deflationary gap is the shortfall in AD
from the level required to maintain full employment equilibrium in the economy.
In such a situation, there is involuntary unemployment in the economy.
When
there is a situation of deficient demand,
resources are not fully utilized and there
is excess capacity in the economy. The economy moves towards deflation. as the aggregate demand is not sufficient to
purchase the potential output, income, output and employment in the economy
will fall. Due to excess supply and low demand, prices
of commodities fall.
A situation of deflationary pressure emerges in the economy.
Deflationary pressure is proportionate to
deficient demand i.e. deflationary gap is a measure of the amount of deficient
demand in the economy.
Greater the deficient demand, greater the deflationary
pressure.
Below graph
explains the deflationary gap
 |
| Deflationary gap |
AD1: Underemployment Aggregate
demand
