When an economy is experiencing a negative output gap, there is:
A) inflationary pressure due to low demand.
B) inflationary pressure due to high demand.
C) significant inflationary pressure due to low demand.
D) significant inflationary pressure due to high demand.

Question

Quizplus · Accepted Answer

A negative output gap means that the actual output of the economy is lower than its potential output. This is usually due to a low demand for goods and services, which creates a surplus of supply. With low demand, firms are usually forced to lower their prices, which can lead to deflationary pressures rather than inflationary pressures. Therefore, the correct answer is A.

When an Economy Is Experiencing a Negative Output Gap, There