Question

in an open mixed economy, the inflationary expenditure gap may be described as the: select one: a. excess of ca ig xn g at the full-employment gdp b. excess of gdp over ca ig xn g at the full-employment output c. excess of sa m t over ig x g at the full-employment gdp d. extra consumption that occurs when investment increases in a full-employment economy

Answer 1

The inflationary expenditure gap in an open mixed economy is described as the excess of total aggregate expenditure (CA + I + G + XN) over the GDP at full-employment, which causes an increase in the price level due to the inability of the economy to absorb this expenditure. Therefore, the correct option is A.

Step-by-step explanation:

In an open mixed economy, the inflationary expenditure gap may be described as the excess of aggregate expenditure over what is needed to reach potential GDP at the full-employment output. Specifically, this gap is represented by option a. excess of CA + I + G + XN over GDP at the full-employment GDP.

The inflationary gap suggests that the economy cannot produce enough goods and services to absorb the level of aggregate expenditures, leading to an inflationary increase in the price level.

The Keynesian cross equation illustrates this scenario through the graphical representation of the aggregate expenditure schedule, where the equilibrium point above the potential GDP indicates an inflationary gap.

To address an inflationary gap, policy solutions may involve measures to shift the aggregate expenditure schedule downward, such as through tax increases or spending cuts, to reach a new equilibrium at potential GDP, as indicated in Figure B9.