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27 December, 16:30

If the economy is rising above potential real gdp. What does it mean?

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  1. 27 December, 16:34
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    It means the economy is in an "inflationary gap."

    Explanation:

    An inflationary gap exists when demand for goods and services exceeds production because of higher than expected increases in employment, government spending etc. This unexpected increase in spending causes real GDP to be higher than potential GDP, and the difference is the "inflationary gap." Potential GDP is the anticipated GDP if the economy was experiencing full employment.

    Eventually, prices will rise or production will increase to meet demand and the gap will close so that the economy is in equilibrium.
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