Consider the following statements regarding the lsquo Inflationary gap rsquo I The shortfa...........

Finance (Phase -I & II) Inflation Trends

Consider the following statements regarding the ‘Inflationary gap’:

I. The shortfall in total spending of the government (i.e. fiscal surplus) over the national income creates inflationary gap in the economy.

II. The excess of total government spending above the national income (i.e. fiscal deficit) is known as the inflationary gap.

Which of the following statement(s) is/are correct?

Only I

Only II

Both I and II

Neither I nor II

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Explanation:

The excess of total government spending above the national income (i.e. fiscal deficit) is known as the inflationary gap. This is intended to increase the production level which ultimately pushes the prices up due to extra-creation of money during the process.