Which statement describes an inflationary gap?

• A. Aggregate demand is greater than aggregate supply
• B. Unemployment is high
• C. Resources are underutilized
• D. Price stability is achieved

Answer: (A)

An inflationary gap occurs when the level of aggregate demand in the economy outpaces the economy’s ability to produce at full capacity. When demand exceeds what the economy can supply, prices tend to rise as firms raise prices to balance demand with limited resources. The description that aggregate demand is greater than aggregate supply captures this overheating of demand.

In this situation, unemployment is typically low because firms need more workers to meet higher demand, and resources are fully utilized or stretched. Price stability is not achieved because the excess demand puts upward pressure on prices. The other statements—high unemployment, underutilized resources, or price stability—do not fit the idea of demand pushing beyond supply.