An inflationary gap results from economic output exceeding potential, policymakers can use expansionary policy to address this.
An inflationary gap occurs when actual economic output rises above economic potential. This signifies a situation where the aggregate demand and short-run aggregate supply curves intersect above potential output, leading to an excess in real GDP compared to the potential level. Policymakers can address this gap using expansionary policy to increase real GDP and bring the economy back to equilibrium.
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