Demonstrate Graphically and Explain the Case of an Inflationary Gap

question 5

Essay

Demonstrate graphically and explain the case of an inflationary gap.Describe the forces in the economy that will result in the gap closing itself.
The diagram:

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Definitions:

Unit Elastic

A situation in which the percentage change in quantity demanded is equal to the percentage change in price.

Inelastic

Describes a situation where the demand for or supply of a good or service is relatively unresponsive to changes in price.

Elasticity of Supply

A measure of how much the quantity supplied of a good changes in response to a change in its price.

Productive Capacity

The maximum output a company or economy can produce with its current resources and technology, without causing inflation.