Refer to Figure 11.3.Assume aggregate demand is represented by AD₁ and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

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Quizplus · Accepted Answer

The inflationary GDP gap is the difference between the current level of output (represented by the intersection of aggregate demand and aggregate supply curves) and full-employment output. In this case, the intersection occurs at a level of output of $6 trillion, which is $400 billion above the full-employment level of $5.6 trillion. Therefore, the inflationary GDP gap is $400 billion.