Final answer:
The aggregate expenditure-output diagram is a tool used in economics to show the relationship between aggregate expenditure and the level of output in an economy. In the context of an inflationary gap, this diagram helps us understand the situation where aggregate expenditure exceeds the potential GDP of an economy.
Step-by-step explanation:
The aggregate expenditure-output diagram is a tool used in economics to show the relationship between aggregate expenditure and the level of output in an economy. In the context of an inflationary gap, this diagram helps us understand the situation where aggregate expenditure exceeds the potential GDP of an economy. The following figure shows the aggregate expenditure-output diagram with an inflationary gap:
In this diagram, the X-axis represents the level of output or real GDP, and the Y-axis represents aggregate expenditure. The curve labeled Aggregate Demand (AD) represents the total spending in the economy at each level of output, while the curve labeled Short-run Aggregate Supply (SRAS) represents the total quantity of goods and services that firms are willing to supply at different price levels.