If real output is currently less than the natural level of real output,what impact will an increase in aggregate demand have on the market?
A)It will make the current recessionary gap smaller.
B)It will make the current inflationary gap smaller.
C)It will make the current inflationary gap larger.
D)It will make the current recessionary gap larger.

Question

Quizplus · Accepted Answer

An increase in aggregate demand will push the actual output closer to the natural level of output, thereby reducing the recessionary gap. Option B is incorrect because inflationary gap arises when actual output exceeds the natural level of output. Option C is also incorrect because an increase in aggregate demand would not cause the inflationary gap to increase. Option D is incorrect because an increase in aggregate demand would not deepen the recessionary gap, but shrink it.

If Real Output Is Currently Less Than the Natural Level