(A) Using a Graph Showing Aggregate Demand, Short-Run Aggregate Supply

question 21

Essay

(a) Using a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply, illustrate an economy that faces an inflationary gap. (b) Explain how the inflationary gap can be eliminated and evaluate the possibilities.

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Definitions:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor costs.

Overapplied

A situation in cost accounting where the allocated overhead costs exceed the actual overhead costs.

Finished Goods Inventory

The stock of completed products that are ready to be sold.

Underapplied

Describes the situation where the allocated manufacturing overhead is less than the actual manufacturing overhead incurred.