Deflationary Gap

Deflationary gap is situation when economy is producing less than it’s potential. It means that actual output sink below the potential output. Whereas in Inflationary gap we saw, the actual output above potential output.
Why this situation can take place ?
When savings are more than the investment, the purchasing capacity is reduced. To buy the goods and services, there is need of more investment, which acts as remuneration for the economic activity. Hence lower investment with more saving and less expenditure by government is reason for this situation to take place.

In deflationary gap, resources are under utilized as the equilibrium take place below the equilibrium at full level employment. There is widespread unemployment, less demand and more supply.
Whereas in inflationary gap, we saw aggregate demand more than aggregate supply.

When will this situation cease to exist ?
These condition will stop, when there will be more aggregate demand. Or, by reducing the aggregate supply. But lowering supply would settle the economy at low production level, hence is not suitable. Whereas decreased savings and increasing investment will provide a chance to take economy back to full employment production level, given deflation spiral is broken.

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