An inflationary gap is the amount by which
A)real GDP exceeds potential GDP.
B)potential GDP exceeds real GDP.
C)the price level must adjust to achieve full employment.
D)aggregate demand must increase to achieve full employment at a given price level.
E)potential GDP must increase to achieve full employment at a given price level.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when actual or real GDP exceeds potential GDP. This means that the economy is producing more than its sustainable capacity, which can lead to upward pressure on prices and inflation. To close the inflationary gap, aggregate demand needs to be reduced, either through government policy such as reducing spending or increasing taxes, or through a natural slowdown in the economy.

An Inflationary Gap Is the Amount by Which