If equilibrium GDP exceeds full-employment GDP,
A)The difference is the recessionary GDP gap.
B)The difference is the inflationary GDP gap.
C)Inventories will accumulate.
D)Leakages must be greater than injections.

Question

Quizplus · Accepted Answer

When equilibrium GDP, which is the level of output that results in neither a recessionary nor an inflationary gap, exceeds full-employment GDP, there is an inflationary GDP gap. This means that there is excessive aggregate demand in the economy which leads to upward pressure on prices. In order to maintain price stability, policies such as monetary or fiscal policy may need to be implemented to reduce aggregate demand and close the GDP gap.

If Equilibrium GDP Exceeds Full-Employment GDP