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Excess & Deficient Demand · Question 24 of 53

The graph shows AD₂ below AD at the full-employment income.

Question 24

MediumOriginal question

The graph shows AD₂ below AD at the full-employment income. The deflationary gap is

A dashed 45° line, an AD line that meets it at F at the full-employment income of ₹400 crore, and a lower line AD₂. At ₹400 crore of income, AD₂ is ₹340 crore (point D), ₹60 crore below F. AD₂ meets the 45° line at E₂, at an income of ₹280 crore.
Options for question 24

Show the answer and explanation
CorrectNot quiteAnswer A

Correct answer: A

Explanation

  1. At the full-employment income of 400, AD₂ = 340 (point D) while full-employment output is 400 (point F).

  2. Gap = 400 − 340 = ₹60 crore.

Worth noting

₹120 crore is the shortfall of equilibrium income (400 − 280), not the gap in demand.

Concept
Reading the deflationary gap
Typical time
70 s
Your time
—
The rule this testsDeficient demand and the deflationary gap
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