What happens to employment levels in an inflationary gap?

In an inflationary gap, the economy is operating above its potential output level, leading to increased demand for goods and services. This heightened demand typically results in businesses needing to hire more workers to meet production needs. As a consequence, employment levels rise.

When demand is strong, firms often find themselves competing for labor, leading to more job openings and potentially higher wages to attract workers. This increase in employment contributes to the higher levels of output that characterize an inflationary gap.

Therefore, the correct answer reflects the relationship between economic expansion and employment, clearly indicating that during such periods, employment levels tend to increase.