An inflationary GDP gap will cause further because input prices rise in the long run in order to meet the increase in output prices.

Answer 1

An inflationary GDP gap will cause further inflation because input prices rise in the long run to meet the increase in output prices. When an economy is producing beyond its potential GDP, demand for goods and services increases, leading to higher prices. As businesses face higher demand and input costs increase (due to rising wages and material prices), they will likely pass those costs on to consumers, creating a cycle of rising prices. This can also lead to expectations of further inflation, which can further drive up costs and prices in the economy.