The economy cannot remain indefinitely with real GDP greater than potential GDP because the money wage rate will
A)decrease, shifting the LAS curve rightward.
B)decrease, shifting the SAS curve rightward.
C)increase, shifting the LAS curve leftward.
D)increase, shifting the SAS curve leftward.
E)increase, shifting the SAS curve rightward.

Question

Quizplus · Accepted Answer

When real GDP is greater than potential GDP, the economy is operating above its sustainable capacity, leading to upward pressure on wages. As the money wage rate increases, production costs rise, causing the short-run aggregate supply (SAS) curve to shift leftward, moving the economy back towards potential GDP.

The Economy Cannot Remain Indefinitely with Real GDP Greater Than