Explain the meaning of deflationary gap with the help of a diagram.
OR
Explain with the help of a diagram the concept of deficient demand in macroeconomics.
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When at full employment level of income, AD is lesser than AS, the deficiency in AD is termed as "Deficient Demand". As deficient demand leads to deflation in the economy, it is also known as 'Deflationary Gap' (Shown by AB in given diagram).
Point E denotes the point of equilibrium, at this point AD curve intersects the 45° Line. OM denotes the equilibrium output. Let us suppose that full employment is OF in the diagram. At the full employment level, AD is denoted by BF, while AS is denoted by AF. This implies that AD is less than what is necessary to achieve full employment output (OF). It denotes a situation of Deficient demand, diagrammatically shown by 'AB', which denotes the deflationary Gap(AF - BF) = AB.
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