In an inflationary gap, the real GDP is greater than what level?

The correct answer is that in an inflationary gap, the real GDP is greater than the full-employment level of GDP. An inflationary gap occurs when actual economic output (real GDP) exceeds the potential output that the economy can sustain over the long term without increasing inflation. This potential output is often referred to as the full-employment level of GDP, where all resources, including labor, are utilized efficiently.

When the economy operates above this full-employment level, it indicates that there are insufficient resources to maintain that level of production sustainably, leading to upward pressure on prices and thus, inflation. In this scenario, demand is outpacing the economy's ability to supply goods and services, resulting in higher production costs as firms may need to pay more to attract scarce resources.

In contrast, potential GDP represents the maximum output achievable without incurring inflation, while natural GDP and equilibrium GDP refer to levels where the economy is balanced and operating efficiently without disequilibrium. Therefore, in an inflationary gap, the focus is specifically on the situation where production surpasses the sustainable full-employment output, thereby affirming the significance of understanding this relationship in macroeconomic theory.