PRC-3 · Chapter 13 · Question 12 of 50
The government injects massive spending into the economy when the nation is already operating at maximum, full-employment capacity. Because factories cannot physically produce more goods, what will this excess demand create?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) An inflationary gap
Explanation
When aggregate demand exceeds aggregate supply at the full-employment level, the excess demand cannot induce more output, so it simply pulls prices up, creating an inflationary gap.
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