Concept:An inflationary gap occurs when aggregate demand exceeds the level needed for full employment, causing upward pressure on prices.
Explanation:In the national income diagram, the full employment level of output is shown by the equilibrium or potential output line.
Point X is located above this full employment position.
At that point, planned aggregate expenditure is greater than the full employment output.
This excess demand cannot be met by existing productive capacity.
As a result, prices rise and the economy experiences demand-pull inflation.
Therefore, the gap measured at X is not a deflationary or recessionary gap, because those would occur below the full employment level.
Instead, X is the inflationary gap, caused by too much spending in the economy.
Answer:C. inflationary gap
