Suppose an economy has an upward-sloping aggregate supply curve and a recessiona

Question

Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of $50 billion:
The recessionary GDP gap will be eliminated.
The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.
The resulting equilibrium GDP will be greater than full employment GDP because of demand-pull inflation.
Cyclical unemployment will increase.

Explanation / Answer

The resulting equilibrium GDP will be greater than full employment GDP because of demand-pull inflation.

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