If real GDP is less than potential GDP, we would expect
A)the money wage rate to fall.
B)the money wage rate to rise.
C)potential GDP to increase.
D)potential GDP to decrease.
E)the exchange rate of the Canadian dollar to rise.

Question

Quizplus · Accepted Answer

If real GDP is less than potential GDP, it means that the economy is producing below its maximum capacity. This can create an excess supply of goods and services, which puts downward pressure on prices. In order to restore equilibrium, firms may choose to reduce the money wage rate, which would decrease their production costs and increase their competitiveness. As a result, the overall level of output and employment should rise, bringing the economy closer to its potential level.

If Real GDP Is Less Than Potential GDP, We Would