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

Quizplus · Accepted Answer

To reach potential GDP, the economy must decrease aggregate demand, which can be achieved by reducing expenditures or increasing prices. Therefore, the expenditure level must fall and/or the price level must rise. This would shift the aggregate demand curve to the left, reducing inflationary pressures and bringing the economy back to potential GDP.

Figure 9-4 ​

Figure 9-4