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When actual output is greater than potential output there is a(n):

A. expansionary gap.
B. budget deficit.
C. budget surplus.
D. recessionary gap.

1 Answer

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Final answer:

When actual output exceeds potential output, it is known as an expansionary or inflationary gap, indicating the economy is producing beyond its potential and may lead to inflation.

Step-by-step explanation:

When actual output is greater than potential output, there is a expansionary gap. This scenario is also known as an inflationary gap. In a Keynesian cross diagram, when the aggregate expenditure schedule intersects the 45-degree line above potential GDP, it indicates an economy is producing beyond its capacity, which can lead to inflation as the economy tries to increase output past its supply-side limits.

This differs from a recessionary gap, where output is below potential, leading to higher unemployment, and from budgetary terms like budget deficit or budget surplus, which refer to government spending in relation to tax revenue.

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