Using the aggregate expenditure-output model, assume the aggregate expenditures (AE) line is above the 45-degree line at full-employment GDP. This vertical distance is called a(n):
A) inflationary gap.
B) recessionary gap.
C) negative GDP gap.
D) marginal propensity to consume gap.

Question

Quizplus · Accepted Answer

A vertical distance between the aggregate expenditures (AE) line and the 45-degree line at full-employment GDP indicates that the economy is operating above its potential output. This is known as an inflationary gap, meaning that the economy is producing more than it is capable of, potentially leading to higher prices and inflation.

Using the Aggregate Expenditure-Output Model, Assume the Aggregate Expenditures (AE)