Use the following to answer questions: -(Figure: Inflationary and Recessionary Gaps) Refer to Figure: Inflationary and Recessionary Gaps. At E₃, the economy: A) is in a long-run equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is stagnating.

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An inflationary gap occurs when the actual output exceeds the potential output, leading to upward pressure on prices due to high demand. In the context provided, the economy is producing beyond its long-run sustainable level, indicating an inflationary gap.

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