If a demand shock causes an economy to operate at a point above potential GDP,then
A) the aggregate supply curve will shift to return the economy to the original point of equilibrium
B) the economy will correct itself through rising wages and prices
C) this short-run equilibrium point will become the new long-run equilibrium GDP
D) the economy will correct itself through falling wage rates and prices
E) the shock is said to be a negative demand shock

Question

Quizplus · Accepted Answer

When an economy operates above potential GDP due to a demand shock, it leads to upward pressure on wages and prices, causing them to rise. This process helps the economy self-correct back to its potential GDP in the long run.

If a Demand Shock Causes an Economy to Operate at a Point