Suppose that the economy is in long-run macroeconomic equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is a(n) _____ gap with _____.
A) recessionary; high inflation
B) recessionary; low inflation
C) inflationary; high unemployment
D) inflationary; low unemployment

Question

Quizplus · Accepted Answer

When aggregate demand increases in an economy that is already in long-run macroeconomic equilibrium, it leads to an inflationary gap. This gap is characterized by an increase in the price level (inflation) and a decrease in unemployment, as firms increase production to meet the higher demand, thus hiring more workers.

Suppose That the Economy Is in Long-Run Macroeconomic Equilibrium and Aggregate