An inflationary gap occurs when
A) aggregate demand falls, but other things remain constant.
B) short-run aggregate supply falls, but other things remain constant.
C) the short-run equilibrium level of real GDP is greater than long-run aggregate supply.
D) the short-run equilibrium level of real GDP is less than long-run aggregate supply.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when the short-run equilibrium level of real GDP is greater than long-run aggregate supply. This means that the economy is producing above its sustainable level, which can lead to inflationary pressures such as rising prices and wages.

An Inflationary Gap Occurs When