As an inflationary gap self-corrects, the equilibrium price level _____ and the equilibrium real output _____.
A) rises; decreases
B) rises; increases
C) falls; decreases
D) falls; increases

Question

Quizplus · Accepted Answer

An inflationary gap self-corrects as the increased demand leads to higher prices and wages, eventually causing firms to reduce output as costs rise, thus decreasing the equilibrium real output.

As an Inflationary Gap Self-Corrects, the Equilibrium Price Level _____