When the inflationary gap is finally eliminated, a long-run equilibrium is established with a ____ price level and with GDP ____ potential GDP.
A)higher; equal to
B)higher; greater than
C)lower; equal to
D)lower; greater than

Question

Quizplus · Accepted Answer

When the inflationary gap is eliminated, the economy reaches a long-run equilibrium where the price level is higher due to the previous inflation, and GDP is equal to potential GDP, indicating that all resources are being used efficiently.

When the Inflationary Gap Is Finally Eliminated, a Long-Run Equilibrium