As an inflationary gap is eliminated through an economy's self-correcting adjustments process,
A) the equilibrium price level increases and the equilibrium real output decreases.
B) the equilibrium price level decreases and the equilibrium real output increases.
C) the equilibrium price level and the equilibrium real output increase.
D) the equilibrium price level and the equilibrium real output decrease.

Question

Quizplus · Accepted Answer

In an inflationary gap, the economy is producing above its potential output, leading to upward pressure on prices. As the economy self-corrects, prices rise (equilibrium price level increases) and output decreases to return to potential output.

As an Inflationary Gap Is Eliminated Through an Economy's Self-Correcting