An expansionary gap is closed in the long run by a(n) _____
A) rightward shift of the short-run aggregate supply curve.
B) leftward shift of the short-run aggregate supply curve.
C) upward movement along a fixed short-run aggregate supply curve.
D) increase in aggregate demand.
E) decrease in aggregate demand.

Question

Quizplus · Accepted Answer

An expansionary gap occurs when aggregate demand exceeds the potential output of the economy, leading to an increase in prices and output in the short run. In the long run, however, wages and other input prices will adjust to the new level of output, causing the short-run aggregate supply curve to shift leftward. This shift will continue until the economy returns to its potential output level where there is no longer an expansionary gap. Therefore, the correct answer is B, a leftward shift of the short-run aggregate supply curve.

An Expansionary Gap Is Closed in the Long Run by A(n)