Suppose the economy is in an inflationary gap. In the absence of any policy intervention, the short run?

Suppose the economy is in an inflationary gap. In the absence of any policy intervention, the short run aggregate supply curve will eventually shift _______________, causing the price level in the economy to ___________________ and output to ________________.

(a) up; rise; rise
(b) down; fall; rise
(c) up; rise; fall
(d) up; fall; rise

Answer:
(c)

draw the picture. The SRAS curve will always shift towards the potential (full employment) output curve. In this case, SRAS will shift *left*, which is the same as *up*, and will lower output and increase the price because of the inverse relationship between those two variables described by the AD curve.

Note that (b) **cannot** be correct since we are already in an inflationary gap, and (b) calls for output to rise, which will make our inflationary gap even worse! Also note the name "inflationary gap" implied that the equilibrating forces will cause prices to *rise* (i.e. inflation) but that (b) calls for prices to fall. So, (b) is wrong on two counts.

(B)

I have a feeling that you're trying to get someone to do your homework for you so be aware that this is based on a quick internet search and that I am no expert on the topic.

I hope I'm not helping some duffus get an economics degree.

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Suppose the economy is in an inflationary gap. In the absence of any policy intervention, the short run?

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