If the short-run aggregate supply curve intersects the aggregate demand curve to the right of the long-run aggregate supply curve, then the economy has _____ gap, and the government can close the gap using _____ fiscal policy.

Question

Quizplus · Accepted Answer

When the short-run aggregate supply curve intersects the aggregate demand curve to the right of the long-run aggregate supply curve, it indicates an inflationary gap. To close this gap, the government would use a contractionary fiscal policy to decrease demand, bringing the economy back to its potential output.

If the Short-Run Aggregate Supply Curve Intersects the Aggregate Demand