Question

An inflationary output gap is characterized by

A) real GDP falling below potential output.
B) constant prices.
C) real GDP exceeding potential output.
D) real output that varies one-for-one with aggregate demand.
E) falling prices.

Answer 1

An inflationary output gap occurs when the economy is producing more than its potential output. This means that real GDP exceeds potential output, leading to inflation without an increase in real GDP.

Step-by-step explanation:

An inflationary output gap occurs when the economy is producing more than its potential output. This means that real GDP exceeds potential output, leading to a higher price level (inflation) without an increase in real GDP. This concept is illustrated by the vertical AS curve at potential GDP, where any increase in aggregate demand (AD) leads to inflation without increasing real output.