If the economy is in an expansion, it is likely that

Question

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In an expansion, the economy is producing more output than in a recession or a trough, and hence aggregate demand is likely to be high. This implies that the economy is producing at a level higher than potential GDP. As potential GDP is the maximum sustainable level of output, it is not possible to sustain this level of output in the long run without inflationary pressures. Therefore, the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. Choice A is incorrect because the economy can be in equilibrium in an expansion as long as the level of output is below or at potential GDP. Choice B is incorrect because the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. Choice C is incorrect because the aggregate demand curve and the inflation adjustment line must intersect at some point. Choice E is incorrect because, in equilibrium, aggregate expenditures should be equal to real GDP.

If the Economy Is in an Expansion, It Is Likely