Figure 9-4

In Figure 9-4, if the economy faces an inflationary gap, what must happen to reach potential GDP?

Question

Figure 9-4

In Figure 9-4, if the economy faces an inflationary gap, what must happen to reach potential GDP?

Quizplus · Accepted Answer

In order to reach potential GDP, the economy must reduce aggregate demand (expenditure level). This can be achieved by decreasing government or consumer spending, increasing taxes or interest rates, or decreasing the money supply. Additionally, the price level may rise as a result of reduced aggregate supply, which can also help the economy reach potential GDP. Therefore, the correct answer is D, where the expenditure level must fall and/or the price level must rise.

Figure 9-4 In Figure 9-4, If the Economy Faces an Inflationary Gap