If the economy is above full employment,there is ________ gap,and as the economy adjusts toward full employment,the price level ________.
A)a recessionary;rises
B)an inflationary;falls
C)a recessionary;falls
D)an inflationary;does not change
E)an inflationary;rises

Question

Quizplus · Accepted Answer

If the economy is above full employment, it means that the labor market is tight, which puts upward pressure on wages and production costs, causing firms to raise prices. This creates an inflationary gap. As the economy adjusts toward full employment, there will be more demand for goods and services, causing prices to rise even further, hence an inflationary gap will cause the price level to rise. Therefore, the correct answer is (E), an inflationary gap causes the price level to rise.

If the Economy Is Above Full Employment,there Is ________ Gap,and