Question

Hello - I need assistance with the below econ. question:

Which of the following is true of an inflationary gap?

	a.	It occurs when an economy’s aggregate expenditures are lower than its actual output.
	b.	It results in an increase in the stock of inventories.
	c.	It results in a decrease in input prices.
	d.	It results in an inflationary increase in the price level of an economy.

Answer 1

Inflationary gap is a situation when the real GDP excedds the potential or anticipated GDP which is achieved at full employment. in such a situation , the aggregate demand would be rising which leads to an increase in consumption . so this creates an increase in the price level of the economy. so this increase in prices would lead to a decrease in purchasing power and hence the aggregate demand would be falling and thus the output would be abck at full employment level .

inflationary gap could be corrected by the government bny using the fiscal or monetary policy instruments.

stock of inventoriues cant increase since the aggregate demand has suddenly increased so the inventories would not increase.

so answer for above question is that it

it results in an infltionary increase in the price level of the economy . (option D)