CA Foundation P4 · Chapter 5 · Question 14 of 15
An inflationary gap exists when:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Aggregate demand exceeds aggregate supply at the full-employment level of output
Explanation
At full employment output cannot increase in the short run, so excess aggregate demand raises prices. The amount by which AD exceeds the level needed for full-employment equilibrium is the inflationary gap. A shortfall of AD is a deflationary gap.
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