Starting from the potential output, if consumer confidence increases and consumers decide to spend more, then this will generate an expansionary output gap and the price level will increase, ceteris paribus. Hence, Option D is correct.
The term ceteris paribus is basically a Latin term which means that all the things remain constant or it can also be termed as nothing will change.
As per the assumptions made in economics, apart from the stated change, nothing will change when it is ceteris paribus. As per the given situation, with the increase in spending confidence, the price will also increase.
Thus, Option D is correct.
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The complete question has been attached in text form:
Starting from the potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) _____ gap and inflation will _____.
recessionary; increase
recessionary; decrease
expansionary; decrease
expansionary; increase
