Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What characterizes a deflationary gap?

1. A situation where resources are fully employed

2. A condition with high inflation rates

3. A situation in which resources are underutilized, affecting output

4. An increase in wages leading to unemployment

The correct answer is: A situation in which resources are underutilized, affecting output

A deflationary gap is characterized by a situation where resources are underutilized, leading to a decrease in overall economic output. This term reflects a period when the actual output of an economy falls short of its potential output due to insufficient aggregate demand. In this scenario, idle resources such as labor and capital exist because businesses are not producing to their capacity, primarily influenced by low consumer demand and business investment. When resources are underutilized, it indicates that there are not enough expenditures in the economy to maintain full employment and optimal production levels. As a result, the economy may experience lower growth rates, rising unemployment, and more significant economic challenges. This context helps to understand why other options are not suitable. For example, fully employed resources indicate a healthy economy, high inflation rates suggest different economic dynamics, and an increase in wages leading to unemployment does not directly describe the concept of a deflationary gap.