Asked by Tracy Thich on May 17, 2024
Verified
We have an inflationary gap when
A) equilibrium GDP is greater than full employment GDP.
B) full employment GDP is greater than equilibrium GDP.
C) equilibrium GDP is equal to full employment GDP.
D) None of the choices are correct.
Inflationary Gap
A situation where the demand for goods exceeds supply at the current price levels, leading to an increase in prices and inflation.
Equilibrium GDP
The level of Gross Domestic Product where the aggregate supply equals aggregate demand within an economy, leading to a stable economic condition.
Full Employment GDP
The level of GDP produced when the economy is utilizing all available resources, including labor, at the maximum sustainable rate without causing inflation.
- Contrast recessionary and inflationary gaps, emphasizing their implications.
Verified Answer
PR
PurpleHaze RozayMay 22, 2024
Final Answer :
A
Explanation :
An inflationary gap occurs when equilibrium GDP is greater than full employment GDP. This means that the economy is producing more than its potential, leading to higher prices and inflationary pressures. To close the inflationary gap, policymakers may use contractionary monetary or fiscal policies to slow down the economy and reduce inflationary pressures.
Learning Objectives
- Contrast recessionary and inflationary gaps, emphasizing their implications.