Wiping out Inflationary Gap

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The inflationary gap can be wiped out in various ways. Essentially, it starts with additional expenditure by the government, which in turn calls for additional expenditure by the community. Through economy in government expenditure, the excess of aggregate demand can be reduced. However, this is not always possible in practice, as government expenditure cannot be cut down during wartime or period of economic development. To remove this inflationary gap. various methods can be adopted, such as:

  • There can be a rise ill voluntary saving by the community.
  • The government may use the tax system to mop up the surplus purchasing power with people; this will reduce C + I by the same amount as the increase in government expenditure.
  • The output of goods and services may be increased so as to absorb the excess demand.
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