An inflationary gap is created when
A)real GDP is greater than potential GDP.
B)real GDP equal to potential GDP.
C)the inflation rate is less than potential inflation.
D)the price level exceeds the equilibrium price level.
E)potential GDP is greater than real GDP.

Question

Quizplus · Accepted Answer

An inflationary gap is created when the actual level of GDP exceeds the potential level of GDP, resulting in demand-pull inflation. This situation occurs when there is an increase in aggregate demand without a corresponding increase in aggregate supply. As a result, prices rise due to increased demand, causing inflation. Therefore, option A is the correct answer.

An Inflationary Gap Is Created When