AP Macroeconomics Question 81: Answer and Explanation

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Question: 81

7. Suppose an economy is in long-run equilibrium at the full-employment level of output. If government spending then increases,

  • A. an inflationary gap is created because the aggregate demand curve shifts to the right
  • B. an inflationary gap is created because the aggregate supply curve shifts to the right
  • C. an inflationary gap is created because potential GDP shifts to the left
  • D. a recessionary gap is created because the aggregate supply curve shifts to the left
  • E. a recessionary gap is created because the aggregate demand curve shifts to the left

Correct Answer: A

Explanation:

A An inflationary gap exists when the short-run equilibrium of aggregate supply and aggregate demand falls to the right of full-employment output. Starting in long-run equilibrium, an increase in government spending would increase aggregate demand and bring the short-run equilibrium to the right, thus creating an inflationary gap.