Question

In the situation of the deflationary gap ______.

Options

• Demand increases rapidly

• Supply increase rapidly

• Both demand and supply are equal

• All of these

Answer 1

Supply increase rapidly.

Explanation:

In a deflationary gap, aggregate demand is less than aggregate supply at the full employment level.
This happens when people’s spending power is low, so goods remain unsold.
As a result, supply is more than demand, leading to unemployment and falling prices.