An inflationary gap occurs when the actual output of an economy is above its potential output. This can lead to inflation as there is excess demand for goods and services, pushing prices higher.
A change in aggregate demand that leads to an inflationary gap is a shift in the aggregate demand curve to the right. This shift can be caused by various factors such as an increase in government spending, a decrease in taxes, or an increase in consumption or investment. When aggregate demand increases, it puts pressure on firms to produce more goods and services to meet the higher demand. If the firms cannot meet the demand, prices will rise, leading to inflation.
To address an inflationary gap, the government can use monetary or fiscal policy to decrease aggregate demand, such as increasing interest rates or reducing government spending. This will reduce demand and stabilize prices.
a change in aggregate demand that leads to an inflationary gap is shift.
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