Which of the following, if true, would suggest that an expansionary gap exists in an economy?
A) rapid inflation during a period when plant capacity utilization is below average
B) a steady price level coupled with a 5 percent unemployment rate
C) an unemployment rate below its natural rate and an unexpected increase in the consumer price index
D) sluggish growth in the rate of inflation and an exceptional increase in the Dow Jones average
E) a modest increase in the number of new unemployment claims and a lower-than-expected price level

Question

Quizplus · Accepted Answer

An expansionary gap exists when the economy is producing above the potential level of output, and this is indicated by an unemployment rate below its natural rate combined with a rise in the consumer price index. Option A suggests cost-push inflation, which is not necessarily indicative of an expansionary gap. Option B indicates equilibrium in the economy, which does not imply an expansionary gap. Option D suggests stable growth and an increase in stock prices, which do not necessarily indicate an expansionary gap. Option E indicates a slight increase in unemployment claims and a low price level, which do not suggest an expansionary gap.

Which of the Following, If True, Would Suggest That an Expansionary