Use the following to answer questions: Figure: An Increase in Aggregate Demand -(Figure: An Increase in Aggregate Demand) Refer to Figure: An Increase in Aggregate Demand. The short-run equilibrium at Y₂ and P₂: A) exerts pressure for nominal wages to fall as workers seek to restore lost purchasing power. B) exerts pressure for prices to fall, since real GDP exceeds potential real GDP. C) results in a recessionary gap. D) results in an inflationary gap.

Question

Quizplus · Accepted Answer

In the short run, the increase in aggregate demand pushes output and prices up (from YS0 to YS1 and PS0 to PS1). As a result, there is a positive output gap (actual output exceeds potential output) known as an inflationary gap.

Use the Following to Answer Questions