If real GDP exceeds potential GDP,
A) there can be a short- run equilibrium with a recessionary gap.
B) there is neither a long- run nor a short- run equilibrium.
C) there is a long- run and a short- run equilibrium.
D) there can be a short- run equilibrium with an inflationary gap.

Question

Quizplus · Accepted Answer

If real GDP exceeds potential GDP, there can be a short-run equilibrium with an inflationary gap, which means that the economy is producing beyond its capacity and facing rising prices as a result. However, in the long run, this cannot be sustained as the increased demand leads to higher prices and reduced purchasing power, thereby bringing the economy back to its potential level. Therefore, there can be both a short-run and a long-run equilibrium in this scenario.

If Real GDP Exceeds Potential GDP