Answers

2016-02-05T15:27:03+05:30
When the aggregate demand falls short of the Full (Resource/Capacity) Employment Output and likely to stay that way for some time in the absence of external shock or policy intervention, this gap ia called recessionary gap. Unless the aggregate demand rises to fill thuis gap, the economy's output will be less than the potential maximum output and capacity utilisation will be less than 100%. Ideally, the economy should best operate at full employment level, but the shortfall in demand is creating a recessionary gap with the economy forced to bear excess capacity and slowing down capacity expansion investment demand. The potential excess supply and real excess capacity leads to lower or softening of prices. 
On the other hand, when the aggregate demand tends to exceed the full employment output, there is excess demand gap which is called the inflationary gap. Such a gap leads to rise in prices and an incentive for boost in capacity creating investment demand.
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