When an expansionary gap exists,the rate of inflation will
A) tend to rise.
B) tend to fall.
C) remain unchanged.
D) become disinflation.
E) shift the IA line downward.

Question

Quizplus · Accepted Answer

An expansionary gap, where output exceeds potential output, typically leads to an increase in demand for goods and services. This increased demand puts upward pressure on prices and leads to inflation. Therefore, the rate of inflation will tend to rise in an expansionary gap.

When an Expansionary Gap Exists,the Rate of Inflation Will