If there is currently an expansionary gap,an increase in aggregate demand will make the expansionary gap smaller,but a decrease in aggregate demand will make the expansionary gap larger.

Question

Quizplus · Accepted Answer

If there is currently an expansionary gap, it means that actual output is greater than potential output. Therefore, an increase in aggregate demand will lead to an increase in output, which may further widen the gap. Conversely, a decrease in aggregate demand may lead to a decrease in output, which may help to close the gap at least partially. Therefore, a decrease in aggregate demand is more likely to make the expansionary gap smaller, while an increase in aggregate demand may make the gap larger.

If There Is Currently an Expansionary Gap,an Increase in Aggregate