During an inflationary gap,
A)real GDP is less than potential GDP.
B)the aggregate demand curve and the aggregate supply curve intersect at potential GDP.
C)the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP that exceeds potential GDP.
D)the aggregate demand curve and the aggregate supply curve do not intersect.
E)the price level will fall to restore the long-run equilibrium.

Question

Quizplus · Accepted Answer

During an inflationary gap, the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP that exceeds potential GDP, indicating a high level of economic activity beyond the economy's capacity to produce goods and services. This can lead to rising prices and inflationary pressures, which may eventually cause the price level to fall and restore long-run equilibrium. Choices A, B, and D are incorrect because they do not reflect the characteristics of an inflationary gap, and choice E is partly correct but does not fully capture the dynamics of the situation.

During an Inflationary Gap