Suppose the AD curve and the SRAS curve intersect to the right of the LRAS curve.Which of the following is true?
A) The economy is in a recessionary gap.
B) The economy is in an inflationary gap.
C) The economy is in a long-run equilibrium.
D) This situation is actually impossible.

Question

Quizplus · Accepted Answer

When the AD and SRAS curves intersect to the right of the LRAS curve, it indicates that in the short run, the economy is producing at a level higher than the potential output level. This leads to high demand and increases in prices, pushing the economy into an inflationary gap. To return to long-run equilibrium, the SRAS curve will shift leftward, reducing output levels and prices.

Suppose the AD Curve and the SRAS Curve Intersect to the Right