Suppose the economy is in an inflationary gap, as illustrated by point A in the diagram below: Suppose that everyone knows that inflationary gaps lead to cost pressures that will eventually result in the price level rising.Since people expect the price level to rise soon, suppose they increase their buying now (before prices rise).Demonstrate graphically and explain verbally how this will complicate the economy's adjustment story described in the text.

Question

Suppose the economy is in an inflationary gap, as illustrated by point A in the diagram below:  Suppose that everyone knows that inflationary gaps lead to cost pressures that will eventually result in the price level rising.Since people expect the price level to rise soon, suppose they increase their buying now (before prices rise).Demonstrate graphically and explain verbally how this will complicate the economy's adjustment story described in the text.

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The Answer of Suppose the economy is in an inflationary gap, as illustrated by point A in the diagram below:  Suppose that everyone knows that inflationary gaps lead to cost pressures that will eventually result in the price level rising.Since people expect the price level to rise soon, suppose they increase their buying now (before prices rise).Demonstrate graphically and explain verbally how this will complicate the economy's adjustment story described in the text.

Suppose the Economy Is in an Inflationary Gap, as Illustrated