If,at the short-run equilibrium,an expansionary gap exists,the
A) IA line will move upward until actual output equals potential output.
B) IA line will move downward until actual output equals potential output.
C) LRAS line will move upward until actual output equals potential output.
D) LRAS line will move downward until actual output equals potential output.
E) LRAS line and IA line will move downward until actual output equals potential output.

Question

Quizplus · Accepted Answer

An expansionary gap occurs when actual output is greater than potential output at the short-run equilibrium. To eliminate this gap, the economy needs to produce less than the current level of output. This can be achieved through a contractionary monetary policy, which would cause the IA line to move upward. The IA line represents the level of aggregate demand in the economy, and an upward shift would lead to a decrease in output and prices. As the IA line moves upward, it will eventually intersect with the LRAS line at the potential output level, which is the long-run equilibrium. Therefore, the best choice is A - the IA line will move upward until actual output equals potential output.

If,at the Short-Run Equilibrium,an Expansionary Gap Exists,the