The amount by which the equilibrium level of real GDP exceeds the full employment level of GDP is called
- A.recessionary gap
- B.inflationary gap
- C.income multiplier
- D.automatic stabilizer
Correct answer
Explanation
The correct answer is B, inflationary gap. When demand pushes the economy to produce more than it can at full employment, the extra demand only drives prices up. Full-employment GDP, also called potential GDP, is the output an economy can produce when all its resources are in use. If aggregate demand is so high that equilibrium real GDP sits above this level, the difference is the inflationary gap. Real output cannot keep rising beyond capacity, so the excess shows up as rising prices. The idea comes from J.M. Keynes, who used it in his 1940 pamphlet "How to Pay for the War", and the cure is to cut demand through higher taxes, lower government spending or tighter money. Option A is wrong because a recessionary gap is the opposite case, when equilibrium GDP falls short of full employment. Option C is wrong because the income multiplier measures how much income rises for each rupee of new spending. Option D is wrong because automatic stabilisers are tools, such as progressive taxes, that help narrow these gaps. Exam tip: output above potential is an inflationary gap; output below potential is a recessionary gap.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
Show answer
Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
Show answer
UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
Show answer
The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
Read the full explanation →