If equilibrium level of real Gross Domestic Product (GDP) is greater than the full-employment real Gross Domestic Product (GDP) consistent with the position of the economy's long-run aggregate supply (LRAS) curve, then the difference between full-employment real Gross Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is
A) an aggregate demand shock.
B) the level of output consistent with natural unemployment.
C) a recessionary gap.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

If the equilibrium level of real GDP is greater than the full-employment real GDP, then the economy is producing beyond its potential, which creates an inflationary gap. This means that prices of goods and services will rise due to excess demand in the market, and as a result, inflation will increase. Therefore, the correct answer is D - an inflationary gap.

If Equilibrium Level of Real Gross Domestic Product (GDP) Is