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Card 7 / 15:
Use the AD/AS model to explain how an inflationary gap occurs, beginning from the initial equilibrium in .
An inflationary gap is the result of an increase in aggregate demand when the economy is at potential output. Since the AS curve is vertical at potential GDP, any increase in AD will lead to a higher price level (i.e. inflation) but no higher real GDP. This is easy to see if you draw AD 1 to the right of AD 0 .
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