The example of an inflationary gap in 2006-2007 suggested that the economy adjusts
A)rapidly to inflationary gaps by lowering prices.
B)rapidly to inflationary gaps by raising prices.
C)slowly to inflationary gaps by lowering prices.
D)slowly to inflationary gaps by increasing inflation.

Question

Quizplus · Accepted Answer

Inflationary gaps occur when aggregate demand exceeds aggregate supply at the full employment level, leading to increased inflation as prices rise to balance the excess demand. This adjustment process can be slow, as it involves changes in pricing, wages, and possibly monetary policy interventions.

The Example of an Inflationary Gap in 2006-2007 Suggested That