Suppose the economy's short-run equilibrium is at a point to the right of Natural Real GDP.Which of the following statements is true?
A) The economy is in an inflationary gap.
B) The economy is in a recessionary gap.
C) The economy is in long-run equilibrium.
D) This situation is actually impossible.

Question

Quizplus · Accepted Answer

If the economy is producing output beyond its potential, it means actual output (Y) is greater than the natural level of output (Y*) and hence there will be an excess demand for goods and services. This will lead to an increase in prices and hence inflation, thus the economy is in an inflationary gap.

Suppose the Economy's Short-Run Equilibrium Is at a Point to the Right