The situation where the equilibrium level of real GDP falls short of potential GDP is known as
- A.Recessionary gap
- B.Inflationary gap
- C.Demand-side inflation
- D.Supply-side inflation
Correct answer
Explanation
The correct answer is A, Recessionary gap. When actual (equilibrium) real GDP is below the output the economy could produce at full employment, the shortfall is called a recessionary gap.
Potential GDP is the output an economy can produce when its labour and capital are fully employed. If aggregate demand is too weak, equilibrium output settles below this level, workers lose jobs and factories run below capacity. This gap is also called a deflationary gap or contractionary gap. Governments usually respond with expansionary policies, such as higher public spending, tax cuts or lower interest rates, to raise demand and close the gap.
B is wrong: an inflationary gap is the opposite case, when equilibrium GDP is above potential GDP and prices rise.
C is wrong: demand-side (demand-pull) inflation is a rise in prices caused by excess demand, not a shortfall of output.
D is wrong: supply-side (cost-push) inflation comes from rising costs of production, not from output falling short of potential.
Exam tip: actual GDP below potential = recessionary (deflationary) gap; above potential = inflationary gap.
Practice Questions
View allThe widespread deaths due to starvation and epidemics are the characteristics of
- A.famine
- B.poverty
- C.civil war
- D.malnutrition
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A famine is marked by widespread deaths from starvation and from epidemics, which spread through contaminated water, rotting food and bodies weakened by hunger.
Read the full explanation →In India, which of the following can be considered as public investment in agriculture?
1. Fixing Minimum Support Price for agricultural produce of all crops
2. Computerization of Primary Agricultural Credit Societies
3. Social Capital development
4. Free electricity supply to farmers
5. Waiver of agricultural loans by the banking system
6. Setting up of cold storage facilities by the governments
Select the correct answer using the code given below :
- A.1, 2 and 5 only
- B.1, 3, 4 and 5 only
- C.2, 3 and 6 only
- D.1, 2, 3, 4, 5 and 6
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Public investment means government spending that creates lasting assets or capacity, while support prices, free power and loan waivers are subsidies or transfers.
Read the full explanation →Consider the following activities :
I. Production of crude oil
II. Refining, storage and distribution of petroleum
III. Marketing and sale of petroleum products
IV. Production of natural gas
How many of the above activities are regulated by the Petroleum and Natural Gas Regulatory Board in our country?
- A.Only one
- B.Only two
- C.Only three
- D.All the four
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The Petroleum and Natural Gas Regulatory Board covers the downstream chain, refining to sale, but not the production of crude oil and natural gas.
Read the full explanation →Which one of the following equals Personal Disposable Income ?
- A.Personal Income - Direct taxes paid by households and miscellaneous fees, fines, etc.
- B.Private Income - Saving of Private Corporate Sectors - Corporation Tax
- C.Private Income - Taxes
- D.Total expenditure of Households - Income Tax - Gifts received
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In national income accounting the steps run from private income to personal income to personal disposable income. Private income is the factor income of the private sector plus transfers.
Read the full explanation →With reference to India, consider the following pairs:
Organization : Union Ministry
I. The National Automotive Board : Ministry of Commerce and Industry
II. The Coir Board : Ministry of Heavy Industries
III. The National Centre for Trade Information : Ministry of Micro, Small and Medium Enterprises
How many of the above pairs are correctly matched?
- A.Only one
- B.Only two
- C.All the three
- D.None
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Each organisation is paired with the wrong ministry. The National Automotive Board works under the Ministry of Heavy Industries; it supports the automobile sector with testing and certification work and helps run schemes for the industry.
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