What characterizes an expansionary gap?

An expansionary gap is characterized by a situation where actual GDP exceeds potential GDP. This typically occurs during periods of economic growth when the economy is operating above its full capacity, leading to increased production and generally lower unemployment rates. When the economy is in this state, businesses may be operating at full tilt, and resources are being used more intensely than normal, which can result in rising inflation as demand outpaces supply.

In contrast, potential GDP represents the maximum output an economy can sustain over the long term without generating inflationary pressure. Thus, when actual GDP surpasses this level, it indicates an expansionary gap. This growth often reflects increased consumer demand, business investment, and overall economic optimism, which can drive conditions to favor such results.

The other options do not align with the characteristics of an expansionary gap, as they refer to different economic conditions – such as underperformance relative to potential GDP or high unemployment, both of which are associated with a recessionary gap rather than an expansionary one.