What happens to the price level and real output during the market adjustment from an inflationary gap?
A)The price level increases and real output decreases.
B)The price level decreases and real output increases.
C)The price level increases and real output increases.
D)The price level decreases and real output decreases.

Question

Quizplus · Accepted Answer

During the adjustment from an inflationary gap, the economy is producing above its potential output, leading to upward pressure on prices. As the economy adjusts, the price level increases due to higher demand, while real output decreases as the economy moves back towards its potential output.

What Happens to the Price Level and Real Output During