An inflationary gap
A) exists when actual spending is less than intended spending.
B) measures the additional intended spending needed to ensure full employment.
C) indicates the additional spending needed to lower the rate of inflation.
D) measures the increase in GDP needed to achieve full employment.
E) can be eliminated by fiscal policies designed to shift the aggregate demand curve to the left.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when the actual level of spending in the economy exceeds the level necessary to maintain full employment, leading to upward pressure on prices. Fiscal policies that reduce aggregate demand, such as increasing taxes or decreasing government spending, can help close this gap by shifting the aggregate demand curve to the left, thus reducing inflationary pressures.

An Inflationary Gap