Within the framework of the aggregate expenditures model, what will happen if an economy is operating at a real GDP greater than full-employment real GDP?
A) An inflationary gap exists.
B) Real GDP will fall.
C) The inventories of firms will rise.
D) Firms will cut back on their current rate of output.

Question

Quizplus · Accepted Answer

Operating at a real GDP greater than full-employment level means that the economy is producing beyond its sustainable capacity. This will create excess demand, leading to an increase in prices, resulting in inflation. Hence, an inflationary gap exists.

Within the Framework of the Aggregate Expenditures Model, What Will