True
Inflationary gaps occur if the level of aggregate demand is not high enough to provide firms with an incentive to hire enough workers to reach full employment.
In theory, prices should always adjust such that the quantity supplied equals the quantity demanded.
Wages increase as a result of the increase in aggregate demand which in turn raises business costs. This leads to an increase in prices (inflation) and these higher prices reduce consumer purchasing power, causing aggregate demand to fall and the output gap to close.
For instance, let's say there is a national economy that is producing 10,000 gallons of milk per week. However, the aggregate weekly demand for milk is 15,000 gallons. This means there is an inflationary gap of 5,000 gallons of milk per week
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