Page 3 - Lesson Note 46 (1)
P. 3
3. Effect on General Price Level:
Excess demand leads to rise in the general price level (known as
inflation) as aggregate demand is more than aggregate supply.
Meaning of Deficient demand and concept of deflationary Gap: -
Deficient demand refers to a situation when aggregate demand is short
of aggregate supply corresponding to full employment in the economy. It gives
rise to deflationary gap.
The main causes for deficient demand are:
= + + + ( − )
1. Decrease in Propensity to consume:
A decrease in consumption expenditure, due to fall in the propensity to
consume, leads to deficient demand in the economy.
2. Increase in taxes:
AD may also fall due to imposition of higher taxes. It leads to decrease in
disposable income and, as a result, the economy suffers from deficient
demand.
3. Decrease in Government Expenditure:
