When potential output is less than actual aggregate output:
A)the economy faces an inflationary gap.
B)the SRAS curve intersects the AD curve to the left of the LRAS curve.
C)the government should follow an expansionary policy to correct the problem.
D)a decrease in taxes would solve the problem.

Question

Quizplus · Accepted Answer

When potential output is less than actual aggregate output, the economy is producing beyond its sustainable capacity, leading to an inflationary gap. This occurs when the short-run aggregate supply (SRAS) curve intersects the aggregate demand (AD) curve to the right of the long-run aggregate supply (LRAS) curve, not the left.

When Potential Output Is Less Than Actual Aggregate Output