When the economy is in an inflationary gap, what will ultimately happen according to the aggregate demand/aggregate supply model?

In the context of the aggregate demand and aggregate supply model, when the economy is in an inflationary gap, the correct scenario is that the economy will return to full-employment level of GDP when resource costs increase. An inflationary gap occurs when the actual output exceeds the potential output, leading to upward pressure on prices due to increased demand for goods and services that exceed the economy's capacity at full employment.

As companies experience high demand, they may initially hire more workers and increase production. However, this situation is not sustainable in the long term because the increased demand will eventually lead to rising wages and costs for resources. As costs increase, businesses will adjust by reducing their output and hiring, which helps to bring the economy back to the full-employment level of GDP. This adjustment process is aligned with the idea that long-term equilibrium is achieved when the economy operates at its potential output, taking into account resource availability and production capabilities.

Additionally, while an inflationary gap can lead to short-term economic growth, it cannot expand indefinitely without facing negative consequences, especially in terms of rising inflation. Similarly, entering a recession or decreasing employment rates does not directly relate to the self-correcting mechanisms of the economy as it adjusts back toward full employment after an inflationary