What can cause an inflationary gap to occur?

An inflationary gap occurs when the actual output of an economy exceeds its potential output, which is determined by its productive capacity. In this scenario, businesses are producing more goods and services than the economy can sustain, leading to upward pressure on prices due to increased demand. When demand for goods and services outstrips supply, resources become scarce, and businesses may raise prices to manage the excess demand. This situation reflects an overheating economy, where full employment is often reached, and labor or input shortages can also contribute to higher costs and prices.

The other options relate to different economic scenarios. For instance, a reduction in consumer demand would typically not lead to an inflationary gap; rather, it could have a deflationary impact or lead to a contraction of economic activity. Government intervention in the currency market may influence exchange rates but does not directly cause an inflationary gap in terms of output. Increased taxation on corporations usually leads to lower investment and consumption, which again does not contribute to an inflationary gap but may slow economic growth instead. Thus, exceeding the potential output of goods and services is the key factor that causes an inflationary gap.