Discuss the results of aggregate demand increasing more than potential GDP and the results where aggregate...

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Discuss the results of aggregate demand increasing more than potential GDP and the results where aggregate...

Discuss the results of aggregate demand increasing more than potential GDP and the results where aggregate demand curve increase less than potential GDP (limit in 100-150 words long)

business economics

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Answer 1

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When AD is above potential GDP - In this situation , there is the condition of inflationary gap. The demand exceeds the level of production in the economy. This gives rise to the problem of inflation. The prices rise and the value of money declines. It is controlled by the contractionary policies.

When AD is below potential GDP - In this condition , there is recessionary gap. The demand is less than supply. The price of the goods falls due to lesser demand. This condition is controlled by the expansionary policies.

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Discuss the results of aggregate demand increasing more than potential GDP and the results where aggregate...

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