An inflationary expenditure gap is the amount by which:

• A. aggregate expenditures exceed the level required for full-employment output
• B. government spending is less than tax revenue
• C. the money supply increases during a recession
• D. aggregate expenditures fall short of the level required for full-employment output

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of an inflationary expenditure gap. It occurs when aggregate expenditures in the economy are greater than the level needed to achieve full-employment output, causing upward pressure on prices (inflation).
2. Step 2: Recall that aggregate expenditures represent the total spending in the economy, including consumption, investment, government spending, and net exports.
3. Step 3: Recognize that full-employment output is the level of output where all available resources (labor, capital) are used efficiently without causing inflationary pressure.
4. Step 4: Identify that an inflationary expenditure gap means aggregate expenditures exceed the full-employment output level, leading to demand-pull inflation.
5. Step 5: Compare the given options and confirm that the correct description of an inflationary expenditure gap is when aggregate expenditures exceed the level required for full-employment output.