When actual GDP > potential GDP due to excessive demand, it creates a situation called:
Correct Answer: Inflationary Gap
Subject: economics
- Deflationary Gap
- Inflationary Gap
- Stagflation
- Disinflation
Explanation: • <b>Key Fact</b>
Inflationary Gap occurs when actual GDP is greater than potential GDP due to excessive demand.
• <b>Supporting Detail</b>
Deflationary gap is the exact opposite (aggregate demand < potential output).
• <b>Related Concept</b>
It represents a demand-pull inflationary pressure.
• <b>Why wrong options are wrong</b>
Deflationary gap is underutilization of resources.
• <b>Exam Trick</b>
Actual > Potential = Inflationary Gap. Actual < Potential = Deflationary Gap.
• <b>Additional Info</b>
This gap shows the economy is "overheating".