CAPF AC 2021 Q57: Indian Economy – National Income & Economic Growth
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
Answer: (b) inflationary gap
Explanation
Inflationary gap
How to think: compare actual demand with what the economy can produce at full employment.
If equilibrium output is above the full employment level, demand is too high.
Too much demand pushes prices up, so the gap is called inflationary.
| Situation | Name | Result |
|---|---|---|
| Equilibrium GDP above full employment GDP | Inflationary gap (excess demand) | Prices rise |
| Equilibrium GDP below full employment GDP | Recessionary or deflationary gap (deficient demand) | Unemployment |
The other two terms:
| Term | Meaning |
|---|---|
| Income multiplier | How many times income rises for a given rise in investment |
| Automatic stabilizer | Built-in tool such as income tax that steadies the economy |
Answer: (b) inflationary gap.
Why each option is right or wrong
- (a) Incorrect. A recessionary gap is the opposite case: output below the full employment level.
- (b) CORRECT. Output above the full employment level is an inflationary gap.
- (c) Incorrect. The income multiplier is a ratio, not a gap between two GDP levels.
- (d) Incorrect. An automatic stabilizer is a policy feature, not a measure of excess output.
Key point
Excess demand → inflationary gap → cured by cutting spending, raising taxes or tight money. Deficient demand → deflationary (recessionary) gap → cured by the opposite.
Remember
Above full employment = inflationary gap; below = recessionary gap.
Common mistakes
- Reversing the two gaps and marking recessionary for output above full employment.
- Thinking an economy can never produce above its full employment level.
- Confusing the multiplier, which is a number, with a gap in output.
Exam tip
Educated guess: the word exceeds means too much demand. Too much demand means rising prices, which is inflation.
Sources
- NCERT Class XII Economics — Introductory Macroeconomics (determination of income and employment: excess and deficient demand)
- Samuelson and Nordhaus, Economics — The Multiplier Model