Q. Consider the following statements:
1.An inflationary gap arises when total government spending exceeds national income, leading to a fiscal deficit and increased price levels.
2.A deflationary gap occurs when total government spending falls short of national income, causing a fiscal surplus and potential economic slowdown.
Which of the statements given above is/are correct?
Answer: C
Notes:
Explanation:
- An inflationary gap represents a fiscal deficit situation where government spending exceeds national income. This injects excess money into the economy, leading to demand-pull inflation and price rise.
- A deflationary gap is a fiscal surplus situation where government spending is less than the national income, leading to reduced demand, underutilised capacity, and potential economic slowdown or output gap.
Source: Indian economy (Dr.Ramesh Singh)
