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Do Deflationary Gaps Self-Destruct? Do deflationary gaps self-destruct? It is a complicated question to answer and before I can answer it I must explain exactly what a deflationary gap is and what its purpose in economics is. A deflationary gap actually derives from an output gap and that is the difference between the actual level of activity in an economy, and the sustainable amount of activity given the capacity of the economy. An output gap …

…it even worse other economists realised that that inflation and unemployment rose at the same rate in other countries and the term for it is now stagflation and because of stagflation there is no use of having demand management. Since then Keynesian economists were no longer listened to in the govt. and that is when the Classical economists got back in power and created their own theory on deflationary gaps which I will explain below.