In an economy, when __________ is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap.

Question

Refer the given text carefully: According to the Economic Survey 2024-25, the government budget’s projections for the fiscal year 2025-26 indicate that gross direct tax revenue will rise by 12.7%, while gross indirect tax collections are expected to grow by 8.3% relative to FY 2024-25. Direct taxes include income tax and corporate tax, reflecting earnings and profits of households and firms. It plays a key role in revenue growth of the government. Indirect taxes encompass Goods and Services Tax (GST), custom duties and other transaction-based levies. Higher growth rate projected for direct taxes suggests a push to enhance tax buoyancy through improved compliance and reforms. On the other hand, indirect taxes are expected to benefit from consumption trends and Goods and Services Tax (GST) administration improvements. The balance tax strategy aims to mobilize resources while supporting fiscal consolidation and sustainable economic growth. On the basis of the above passage and common understanding, answer the following questions: (i) Differentiate between the two types of taxes indicated in the above text, with suitable examples. (ii) Elaborate the likely consequences of the tax projections made by the government.

Answer 1

Step 1: Defining the concept.
A deflationary gap occurs when the total planned spending in an economy is lower than the level required to maintain full employment. It represents a shortfall in demand that prevents the economy from reaching its maximum productive capacity.
Step 2: Differentiating between ex-ante and ex-post.
- Ex-ante Aggregate Demand: This represents the total demand that households and firms plan or intend to spend at different levels of income.
- Ex-post Aggregate Demand: This refers to the actual or realized spending that has already taken place in the economy.
- Ex-ante Aggregate Supply: This is the planned production of goods and services by producers.
- Ex-post Aggregate Supply: This is the actual total output produced in the economy during a period.

Step 3: Conclusion.
Because the deflationary gap is measured based on intended spending levels rather than actual outcomes, it is linked to (A) ex-ante Aggregate Demand.
Final Answer: ex-ante Aggregate Demand.

In an economy, when __________ is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap.

Show Hint

The Correct Option is A

Solution and Explanation

Top Questions on Income and Expenditure Account

Questions Asked in CBSE Class XII exam