If there is currently an inflationary gap, an increase in aggregate demand will make the inflationary gap smaller, but a decrease in aggregate demand would make the inflationary gap larger.

Question

Quizplus · Accepted Answer

If there is currently an inflationary gap, it means that the economy is producing at a level beyond its potential output, causing prices to rise. In this situation, an increase in aggregate demand would further push up prices, making the inflationary gap larger. On the other hand, a decrease in aggregate demand would slow down the economy and reduce price pressures, making the inflationary gap smaller.

If There Is Currently an Inflationary Gap, an Increase in Aggregate