-In the above figure, the inflationary gap can correctly be identified as
A) the difference between 125 and 120.
B) the difference between 12.2 trillion and 12 trillion.
C) LRAS minus SRAS.
D) AD1.

Question

-In the above figure, the inflationary gap can correctly be identified as
A) the difference between 125 and 120. 
B) the difference between 12.2 trillion and 12 trillion. 
C) LRAS minus SRAS. 
D) AD1.

Quizplus · Accepted Answer

The inflationary gap is defined as the difference between the actual level of real GDP and the potential level of real GDP when the actual level exceeds the potential. This is represented by the difference between the equilibrium level of GDP in the short run (where AD intersects SRAS) and the level of GDP at full employment (where AD intersects LRAS). Choice B correctly identifies this gap as the difference between the actual GDP level (12.2 trillion) and the potential GDP level (12 trillion).

-In the Above Figure, the Inflationary Gap Can Correctly Be