Inflationary Gap - Demand-Pull Inflation | Macro Economics | Keynesian Economics | Ecoholics

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[@Anushka-with1short]

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[@ECOHOLICS]

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[@abhimanyuvaradhi7083]

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[@abhimanyuvaradhi7083]

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[@priyankasudalaimuthu1136]

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[@pwisalicreation9421]

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[@lakshaywalia1653]

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[@ladyortiz1295]

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[@madhavsingh4143]

Good morning ma'am.. if the aggregate demand exceeds the aggregate output in full employment level, even then the output can be increased by the firms by purchasing more capital goods (hence, investing more). This will lead to more output even in full employment (in full employment, Keynes said that output cannot be increased further). This way Keynes theory explained above gets violated. Could you please guide me here??

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[@erialux]

Your question is about the Keynesian model of aggregate demand and aggregate supply, and the concept of inflationary gap. According to this model, when the aggregate demand exceeds the aggregate output at the full employment level, there is an inflationary gap, which means that the economy is producing more than its potential output, and there is upward pressure on the price level. Keynes argued that in the long run, the economy would adjust to this situation by reducing the aggregate demand, either through a fall in consumption, investment, government spending, or net exports, or through an increase in taxes or interest rates. This would bring the economy back to the full employment equilibrium, where the aggregate demand equals the aggregate supply at the potential output level. However, you are wondering if the firms can increase the output even further by purchasing more capital goods, and thus investing more. This would shift the aggregate supply curve to the right, and increase the potential output of the economy. However, this would also reduce the inflationary gap, as the aggregate demand would now be closer to the aggregate supply. Therefore, the Keynesian theory would not be violated, as the economy would still tend to move towards the full employment equilibrium in the long run.

[@neerajdahal13]

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