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Form 6 (A-Level) / Economics

Content
 Engage 6  Grades

Topics Activities

1: DEMAND THEORY

2: SUPPLY THEORY
The equilibrium is at point c, yet full employment point is at X.
3: THEORY OF THE FIRM
The inflationary gap is represented by the distance ab.
4: DISTRIBUTION THEORY
When an inflationary gap exists, the government needs to adopt policy measures to reduce or eliminate
5: GOVERNMENT INTERVENTION
it.
IN THE ECONOMY
The government normally uses fiscal policies to reduce the inflationary gap.
6: INTERNATIONAL TRADE
For example, the government may reduce its expenditure or raise taxes. 101%
7: MEASUREMENT OF ECONOMIC
PERFOMANCE The reduction in government expenditure or a raise of taxation results in the shift of the aggregate
demand downwards, hence changing the equilibrium point.
8: MONEY AND PRICE LEVELS
Fig 7.1.5 shows the shift of the aggregate demand curve downwards to QS.
9: MACRO-ECONOMIC PROBLEMS
AND POLICIES The downward shift of the aggregate demand curve results in a new equilibrium point b.

De ationary gap
The deflationary gap can also be called the recessionary gap.

Deflationary gap occurs when aggregate supply is greater than aggregate demand when the national
economy is at full employment level.

The equilibrium point of national income will be below the full employment level.

If a deflationary gap exists for a long time, it may result in rising inflation and unemployment.

It is important for the government to put measures to reduce or eliminate the deflationary gap.

The government may choose to increase public expenditure and reduce taxation.

The government may also reduce interest rate leading to an increase in investment and consumption.

Such measures increase aggregate demand thereby shifting the demand curve upwards.

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