If the equilibrium level of real GDP per year is greater than the full-employment level of GDP, then
A) a recessionary gap occurs.
B) the economy is at full employment with no price changes.
C) the economy expands the level of real GDP.
D) an inflationary gap occurs.

Question

Quizplus · Accepted Answer

If the equilibrium level of real GDP per year is greater than the full-employment level of GDP, it means that the economy is producing more than it can sustain in the long run, as resources are being used at a rate higher than their potential. This situation creates an upward pressure on prices or an inflationary gap, as demand exceeds supply, and firms increase prices to ration the limited quantity of goods and services available. Therefore, an inflationary gap occurs, and some macroeconomic policies should be implemented to reduce demand and bring GDP back to the full-employment level.

If the Equilibrium Level of Real GDP Per Year Is