According to Keynes, inflationary gap is caused by

According to Keynes, inflationary gap is caused by

by

According to Keynes, inflationary gap is caused by

    1. excess supply
    2. excess demand
    3. deficiency of demand
    4. deficiency of supply

Correct Answer: excess demand 

 Answer Explanation

Keynesian economics defines an inflationary gap as the result of excess demand, which occurs when a economy’s aggregate demand exceeds its aggregate supply. When this occurs, prices rise, creating inflationary pressures.

As a result of excessive demand, inflationary gaps are caused by a series of intricate mechanisms:

Demand-Pull Inflation:

The phenomenon of excess demand is also known as demand-pull inflation. Inflation occurs when consumers and businesses collectively attempt to purchase more goods and services than the existing production capacity can handle. As a result of increased demand, prices rise, eventually resulting in inflation.

Scarcity of resources:

The realm of excess demand invariably generates a shortage of essential resources, including labor, raw materials, and capital. As a result, these resources become scarcer, which leads to an increase in their price, which contributes to an overarching inflationary trend.

The Wage-Price Spiral:

As a result of excessive demand, firms are forced to increase wages in order to attract and retain competent employees. Consequently, wages increase, resulting in higher operational costs that, in turn, are often borne by consumers through higher prices, perpetuating the inflation cycle.

Bottleneck Effects:

As a result of surplus demand, production and distribution networks can become sluggish. As a result of these bottlenecks, prices continue to rise, thereby amplifying the inflationary spiral.

Why the other options are not correct

a. Excess Supply:

Conversely, excess supply characterizes a deflationary gap. In this scenario, aggregate supply overshadows aggregate demand, which ultimately results in price decreases as the demand for goods decreases. An excess supply does not contribute to inflation; rather, it induces downward pressure on prices.

c. Deficiency of Demand:

While a lack of demand can precipitate economic downturns and recessions, it is not the primary cause of inflation. As a result, a recessionary gap, or deficiency of demand, usually leads to increased unemployment rates and underutilized resources, leading to deflationary trends rather than inflation.

 d. Deficiency of supply

The deficiency of supply is not the fundamental cause of inflationary gaps, despite the potential for scarcity or disruption of supply. A deficiency of supply is not an independent source of inflation in an inflationary gap scenario. In an inflationary gap scenario, soaring prices are driven by excess demand, not by a deficiency of supply.

Conclusion

According to Keynesian economics, inflationary gaps are rooted in excess demand. Inflationary pressures are exacerbated as aggregate demand outstrips aggregate supply, resulting in intensified competition for finite resources. While the alternate options may indeed wield significant importance within certain economic contexts, they remain peripheral factors in relation to the core driver of the inflationary gap.

For policymakers and economists alike, understanding the intricate relationship between aggregate demand and aggregate supply is crucial to managing inflation and cultivating a resilient and thriving economy.

Inflation in under-developed country is basically caused by

Bibisha Shiwakoti
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