The gap that exists when equilibrium real GDP is greater than the level of real GDP shown by the position of the long-run aggregate supply curve is
A) the short-run aggregate supply curve.
B) money illusion.
C) a recessionary gap.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

When equilibrium real GDP exceeds the level of real GDP shown by the long-run aggregate supply curve, this is an indication of an inflationary gap. This means that demand is outpacing supply and there is upward pressure on prices. This gap can be closed through a decrease in aggregate demand or an increase in long-run aggregate supply.

The Gap That Exists When Equilibrium Real GDP Is Greater