Problems of Deficient & Excess Demand

1 Mark Questions

1. Give the meaning of deflationary gap. (All India 2014; Delhi 2010,2008)

Ans. When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap.

1. Give the meaning of inflationary gap. (All India 2014,2010; Delhi 2008) Ans. The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.
2. What is meant by excess demand in macroeconomics? Foreign 2014; Delhi 2009)

or

Give the meaning of excess demand in an economy. (All India 2009) Ans. The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.

1. Define involuntary unemployment. (Delhi 2014,2009; All India 2009) or

What is involuntary unemployment? (All India 2009; Delhi 2008)

Ans. Involuntary unemployment is a situation in the economy when even, if people are willing to work: at existing wage rates, they are not getting work.

1. Define full employment. (Delhi 2014, 2009c, 2008; All India 2014) Ans. A situation when all those who are willing to or able to work are getting work, is termed as full! Employment in an economy.
2. Give the meaning of deficient demand. (Foreign 2014; All India 2008) Ans. A situation when the Aggregate Demand is less than the Aggregate Supply in an. economy, corresponding to full employment, is termed as deficient demand.
3. What is under employment equilibrium? (Delhi 2008) Ans. In an economy, when <math>AS = AD</math> or <math>5 = /</math> but without the fuller utilisation of labour force, the economy is said to be in underemployment equilibrium.

3 Mark Questions

1. Explain the distinction between voluntary and involuntary unemployment. (All India 2011)

or Distinguish between voluntary unemployment and involuntary unemployment. (Delhi 2011C)

Ans. Voluntary unemployment is a kind of unemployment situation, when some people are not willing; to work at all or are not willing to work at the existing wage rate.

Involuntary unemployment is a situation in the economy when even if people are willing to work at: existing wage rates, they are not getting work.

9. What is the meaning and implications of deflationary gap? (All India 2011,2008) or

In an economy, Aggregate Demand is less than Aggregate Supply. Explain the changes that will take place in this economy. (All India 2011)

Ans. When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. YA ADFE. AD/AS Deflationary WOA gap ÷Χ Р

National Income (Y)

Deflationary Gap = Deficient Demand

<math>= AD_{FE} - AD_{IU}</math>

<math>= EF</math>

Where, <math>AD_{FE} = AD</math> in full employment

<math>AD_{IU} = AD</math> in involuntary unemployment.

As a result of this producers will stop producing more and hence, income level will fall in the economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to Aggregate Demand.

1. In an economy, Aggregate Demand is greater than Aggregate Supply. Explain

the changes that will take place in this economy. (Delhi 2011c)

Ans. When AD > AS in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual