In an inflationary gap:
A) aggregate output is above potential output.
B) aggregate output equals potential output.
C) aggregate output is less than potential output.
D) short-run flexibility will bring the economy back to its potential output without any intervention.

Question

Quizplus · Accepted Answer

In an inflationary gap, aggregate output is above potential output, which means that the economy is producing more than its maximum sustainable level. This may lead to an increase in prices in the long run and is an indication of an overheated economy. To bring the economy back to its potential output, some intervention may be necessary, such as reducing government spending or increasing taxes.

In an Inflationary Gap