Question 41
HardOriginal questionThere is an inflationary gap of ₹20 crore. By how much should the government cut its spending to close it?
Show the answer and explanation
CorrectNot quiteAnswer B
Correct answer: B
Explanation
The gap is measured in AD at full employment. A cut of ₹20 crore in G lowers AD by ₹20 crore at every income.
That brings AD at full employment down to full-employment output, closing the gap.
Worth noting
₹80 crore is the change in income the cut brings about, not the cut itself.
- Concept
- Size of the cut
- Typical timeTypical
- 100 s
- Your timeYours
- —
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