If real output is currently greater than the natural level of real output,what impact will an increase in aggregate demand have on the market?
A)It will make the current recessionary gap smaller.
B)It will make the current recessionary gap larger.
C)It will make the current inflationary gap smaller.
D)It will make the current inflationary gap larger.

Question

Quizplus · Accepted Answer

If real output is currently greater than the natural level of output, it means the economy is operating at its potential, and unemployment is already low. An increase in aggregate demand will lead to higher prices and inflation, pushing the economy above its potential output, leading to an inflationary gap. Therefore, the correct answer is D.

If Real Output Is Currently Greater Than the Natural Level