Producing an aggregate output level that is higher than potential output is possible only if nominal wages:
A) fully adjust downward..
B) fully adjust upward.
C) haven't yet fully adjusted upward.
D) haven't yet fully adjusted downward.

Question

Quizplus · Accepted Answer

If the economy is producing above potential output, it means there is a temporary increase in demand for goods and services. In this case, firms need to hire more workers and increase production. However, if nominal wages have fully adjusted upward, the cost of hiring additional workers would be too high and firms would not be able to increase production. Therefore, nominal wages must not have fully adjusted upward to allow for an increase in aggregate output.

Producing an Aggregate Output Level That Is Higher Than Potential