Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following EXCEPT:
A) a positive demand shock.
B) a positive inflation shock.
C) an increase in government spending.
D) an increase in the inflation rate.

Question

Quizplus · Accepted Answer

An expansionary gap occurs when actual output exceeds potential output, typically due to increased demand. A positive demand shock, increased government spending, or a positive inflation shock can all increase demand, leading to an expansionary gap. However, an increase in the inflation rate alone does not directly cause an expansionary gap; it is often a result of increased demand rather than a cause.

Suppose the Economy Is Currently Operating at Potential Output; an Expansionary