Suppose the economy is in a short-run equilibrium and actual output is greater than potential output. The economy is in:
A) an inflationary gap; nominal wages will increase and SRAS will shift to the left until actual GDP is equal to potential GDP in the long run.
B) a recessionary gap; nominal wages will decrease and AD will shift to the left until actual GDP is equal to potential GDP in the long run.
C) an inflationary gap; prices of goods will increase and AD will shift to the right until the economy is in long-run equilibrium.
D) a recessionary gap; prices of goods will decrease and LRAS will shift to the left until the economy is in long-run equilibrium.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when actual output exceeds potential output, leading to upward pressure on prices. As nominal wages increase and the cost of production rises, the SRAS curve shifts to the left until the economy reaches long-run equilibrium where actual GDP equals potential GDP.

Suppose the Economy Is in a Short-Run Equilibrium and Actual