# Can You Explain The Inflationary And Deflationary Gaps?

Explain the term inflationary gap and deflationary
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When we look at the Keynes theory of income e and employment we came to know that the level of income and employment is determined where AD= AS. But such equilibrium level of NI does not necessarily represent full employment. According to Keynes:
The equilibrium level of NI may be at full employment. This situation occurs when at the level of full employment maximum level of NI permitted by the utilization of the entire human and natural resources of the economy aggregate demand is equal to aggregate supply.

The equilibrium level of NI may be at above full employment. This situation occurs when at the level of full employment aggregate demand is greater than aggregate supply. This situation corresponds to inflationary gap.The equilibrium level of NI may be at below full employment. This situation occurs when at the level of full employment aggregate demand is less than aggregate supply. This situation depicts deflationary gap.

With such brief review of inflationary and deflationary gaps, we move to explain these concepts, in addition to Keynes Ad and AS curves we will also modern AD and AS curves where we established relationship between price level and AD, price level and AS.
So in the equilibrium level AD= AS.
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10.  Suppose Rent-A-Truck's rates are \$50 a day plus \$0.50 per mile and Sam's you-Drive's
are \$70 a day plus \$0.45 a mile.
A.  Find the mileage at which the cost for the two would be the same.
B.  What is the cost?
C.  Under what conditions should one rent from Rent-A-Truck?

11.  To earn money for college, Susan is making and selling earrings.  Her weekly costs
for advertising and phone calls are \$36, and each pair of earrings costs \$1.50 to
produce.  If Susan sells the earrings for \$6 per pair, how many pairs must she sell
per week to break even?

12.  Rebecca is the star forward on her high-school basketball team.  In one game, her
she make?

13.  When Dale baby-sat for 8 hours and worked at a restaurant for 3 hours, he made a
total of \$58.  When he baby-sat for 2 hours and worked at a restaurant for 5 hours,
he made a total of \$40.  How much does Dale get paid for each type of work?

14.  Beth has saved \$4500.  She would like to earn \$250 per year by investing her money.
pays a 5% annual interest and a high-risk investment that pays a 9% annual interest.
A.  How much should Beth invest in each type of investment to earn her annual
goal?
B.  How much should Beth invest in each type of investment if she wishes to
earn \$325 per year?

15.  The perimeter of a rectangular picture is 86 inches.  Twice the width exceeds the
length by 2 inches.  What are the dimensions of the picture?

16.  The steel braces for a new bridge are in the shape of a right triangle.  The hypotenuse
is 75 meters.  The length of one leg is four times one-third of the length of the other
leg.  Find the lengths of the legs.

17.  Maggie is 12 years old and Dwayne is 16.  How many years ago was Dwayne five
times as old as Maggie?  How old were they at that time?

18.  The sum of three numbers is -4.  The second number decreased by the third is equal
to the first.  The sum of the first and second number is -5.  Find the numbers.
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