When an expansionary gap exists,actual output _________ potential output and the rate of inflation will tend to __________.
A) is greater than;increase
B) is greater than;decrease
C) equals;remain the same
D) is less than;increase
E) is less than;decrease

Question

Quizplus · Accepted Answer

When there is an expansionary gap, actual output is greater than potential output which indicates an overheated economy. This results in an increase in the aggregate demand and excess demand for goods and services, which can lead to inflationary pressure. Hence, the rate of inflation will tend to increase.

When an Expansionary Gap Exists,actual Output _________ Potential Output and the Rate