When the equilibrium level of output in an economy is above its potential output
A) the government should raise its spending.
B) there is an inflationary gap.
C) the long-run aggregate supply curve is horizontal.
D) unemployment rates are high.
E) wages and prices must be rapidly falling.

Question

Quizplus · Accepted Answer

When the equilibrium level of output is above potential output, it indicates that there is excess demand in the economy, which can lead to inflationary pressures. This is known as an inflationary gap. In such a situation, the government may need to use contractionary monetary and fiscal policies to reduce aggregate demand and bring it back to potential output.

When the Equilibrium Level of Output in an Economy Is