Identify one of the following which can NOT be used to close deflationary gap

Analyze the question You are asked which measure CANNOT close a deflationary gap.

Explain the concept A deflationary gap occurs when aggregate demand is too low to achieve full employment output. Actual equilibrium output is below the full-employment level, so there is unemployment and falling prices. To close it, we need to increase aggregate demand (expansionary policy).

• Expansionary fiscal policy: increase government spending, reduce taxes.
• Expansionary monetary policy: increase money supply, reduce interest rates.

Step-by-step evaluation

• A. Increased interest rate: Borrowing becomes more expensive, so investment and consumer spending fall. Aggregate demand decreases, which widens the gap. This is a contractionary tool, used to fight inflation (an inflationary gap), not deflation.
• B. Increased money supply: More money in circulation lowers interest rates and boosts spending. It raises aggregate demand, so it can close the gap.
• C. Increased government expenditure: It directly raises aggregate demand, so it can close the gap.
• D. Reduction in taxes: Disposable income rises, so consumption increases. Aggregate demand rises, so it can close the gap.

Answer: The only option that cannot be used is A. Increased interest rate.

Tip: Remember the pairing:

• Deflationary gap → push demand UP (more spending, lower taxes, more money, lower interest rates).
• Inflationary gap → pull demand DOWN (less spending, higher taxes, less money, higher interest rates).

When you see "NOT" in a question, find the option that goes in the opposite direction from the rest. Here, three options increase demand and one reduces it.