In an economy, when _____ is insufficient to achieve the level of output corresponding to the full employment,

Question 95 of 104

Q. In an economy, when __________ is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap. (Choose the correct option to fill in the blank) Options : (A) ex-ante Aggregate Demand (B) ex-post Aggregate Demand (C) ex-ante Aggregate Supply (D) ex-post Aggregate Supply

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Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

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A deflationary gap occurs when planned (ex-ante) aggregate demand falls short of the level needed for full-employment output. The correct answer is (A) ex-ante Aggregate Demand.

Let’s first get the concept clear. In macroeconomics, the term “gap” refers to the difference between what the economy is actually producing and what it could produce if all resources (labour, capital) were fully employed. That full-employment level of output is also called potential output.

Now, what determines actual output in the short run? According to the Keynesian framework, it is aggregate demand that drives production. Firms produce only as much as they expect to sell. So if total planned spending in the economy — what buyers intend to buy — is less than the value of full-employment output, firms will not produce that full-employment output. They will produce less, leading to unemployment and idle capacity.

That shortfall in planned spending is the deflationary gap. The word “deflationary” signals that the pressure on prices is downward — because demand is too weak to absorb all that could be produced.

Now, why must it be ex-ante (planned) and not ex-post (actual)? Ex-post aggregate demand is always equal to actual output by definition (because what is produced is what is sold, once you account for inventory changes). So ex-post demand can never be “insufficient” — it always matches whatever output happens to be. The gap is about intentions not matching the full-employment target. That is why we use ex-ante concepts.

Deflationary gap = Full-employment output - Actual output (where actual output is determined by ex-ante aggregate demand) \dots

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Which of the following is not a component of aggregate demand?$
(a) Consumption expenditure
(b) Investment expenditure
(c) Net export
(d) Expenditure on financial assets
›Reveal solutionSolution

Expenditure on financial assets is not part of aggregate demand.

Aggregate demand = consumption expenditure (C) + investment expenditure (I) + government expenditure (G) + net exports (X − M). Expenditure on financial assets (buying shares, bonds) is only a transfer of existing assets, not spending on newly p …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. In the situation of inflation$
(a) prices of goods decrease
(b) prices of goods increase
(c) value of money increases
(d) production decreases
›Reveal solutionSolution

In inflation, prices of goods increase.

Inflation is a situation in which there is a sustained rise in the general price level of goods and services in an economy over time. As prices rise, the value (purchasing power) of money falls. It usually occurs when aggregate demand exceeds aggregate s …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. How does an increase in the marginal propensity to consume affect aggregate demand?$
(a) There is no change in the aggregate demand curve
(b) The slope of the aggregate demand curve will increase
(c) The aggregate demand curve will shift to the right
(d) The aggregate demand curve will shift to the left
›Reveal solutionSolution

A higher MPC increases the slope of the aggregate demand curve.

The slope of the aggregate demand (consumption + investment) curve depends on the marginal propensity to consume, because MPC is the slope of the consumption function. When MPC increases, each extra rupee of income raises consumption (and hence AD) by more, so the AD curve becomes **steeper — its slope …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. "Supply creates its own demand." Who said this?$
(a) J. B. Say
(b) Adam Smith
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›Reveal solutionSolution

'Supply creates its own demand' is Say's Law, stated by J. B. Say.

The classical proposition that production (supply) generates enough income to buy the whole output, so there can be no general over-production, is known as Say's Law of Markets, named after the French economist Jean-Baptiste Say. Keynes later crit …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Recession is a state when, in the economy$
(a) Production increases
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(c) Employment and production level increases
(d) Employment and production level falls
›Reveal solutionSolution

In a recession, employment and production both fall.

Recession is a downturn phase of the business cycle in which aggregate demand is weak, so firms cut output and lay off workers. As a result both the level of production and the level of employment fall, incomes decline and economic activity contracts. …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Which is the determining factor for investment?$
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(1) and
(2)
(d) None of these
›Reveal solutionSolution

Investment is determined by both the marginal efficiency of capital and the rate of interest.

According to Keynes, the level of investment depends on a comparison of the marginal efficiency of capital (MEC) — the expected rate of return on new investment — with the rate of interest — the cost of borrowing funds. Investment is profitable and is …

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