If ever real GDP is above potential real GDP, the inflation adjustment line (IA) must
A)remain the same, as this represents a movement along the IA line.
B)shift upward.
C)shift downward.
D)That could never happen.
E)None of these

Question

Quizplus · Accepted Answer

When real GDP is above potential real GDP, there is excess demand in the economy which results in higher prices and inflation. As a result, the inflation adjustment line (IA) needs to shift upward to reflect the higher inflation rate needed to bring the economy back to potential.

If Ever Real GDP Is Above Potential Real GDP, the Inflation