An inflationary gap gradually:
A) increases short-run aggregate supply.
B) decreases short-run aggregate supply.
C) increases aggregate demand.
D) decreases aggregate demand.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when actual output exceeds potential output in the short run, leading to an increase in prices. This occurs due to an increase in aggregate demand. As prices increase, firms increase their production, and SRAS decreases. Therefore, a gradually increasing inflationary gap decreases short-run aggregate supply.

An Inflationary Gap Gradually