Question

In an open mixed economy, the inflationary expenditure gap may be described as the:

a. excess of GDP over Ca + lg + Xn + G at the full-employment output
b. excess of GDP over Sa + M + T over lg + X + G at the full-employment GDP
c. excess of GDP over Ca + lg + Xn + G at the full-employment GDP
d. extra consumption that occurs when investment increases in a full-employment economy

Answer 1

An inflationary expenditure gap in an open mixed economy is described as the excess of GDP over the sum of household consumption, business investment, net exports, and government spending at full-employment GDP, leading to inflation. Therefore, the correct option is C.

Step-by-step explanation:

The inflationary expenditure gap in an open mixed economy can best be described as the excess of aggregate expenditures beyond what is needed to reach potential GDP. Specifically, the correct answer to the student's question is c. excess of GDP over Ca + Ig + Xn + G at the full-employment GDP. This means that at full-employment GDP, the total amount spent in the economy (consumption by households (Ca), investment by businesses (Ig), net exports (Xn), and government spending (G)) is greater than the economy's capacity to produce goods and services, leading to an increase in the price level, or inflation. To address an inflationary gap, fiscal policy measures such as tax increases or government spending cuts may be utilized to decrease aggregate expenditures, bringing the economy back to its potential GDP.