Use the following to answer questions: -(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.The level of income associated with Y₁ in panel (b): A) is equal to potential output. B) reveals an inflationary gap compared with Y_P. C) is a long-run equilibrium. D) is caused by flexible wages and prices.

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The level of income Y1 is less than the potential output YP, indicating an inflationary gap where actual output exceeds potential output, leading to upward pressure on prices.

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