The existence of an inflationary gap implies that
A) the aggregate demand curve intersects the aggregate supply curve above potential output.
B)fiscal policy should be used to push the aggregate demand curve to the right.
C)equilibrium GDP is below full-employment GDP.
D)the aggregate demand curve must be raised to promote a full-employment GDP.
E)government spending should be raised and taxes lowered to help the economy deal with inflation.

Question

Quizplus · Accepted Answer

An inflationary gap exists when the intersection of the aggregate demand curve and the aggregate supply curve is located above potential output. This implies that the economy is producing at a level beyond its capacity, and there is upward pressure on prices.

The Existence of an Inflationary Gap Implies That