Suppose an economy is experiencing an expansionary gap.Which of the following best characterizes what happens in such an environment?
A) Labour shortages drive up money wages, real wages, and prices.
B) An excess supply of labour results due to rising money wages and prices.
C) The economy will self-correct as rising money wages decrease faster than rising prices.
D) The economy will have excessive involuntary unemployment,
E)g., cyclical unemployment.

Question

Suppose an economy is experiencing an expansionary gap.Which of the following best characterizes what happens in such an environment?  
A) Labour shortages drive up money wages, real wages, and prices. 
B) An excess supply of labour results due to rising money wages and prices. 
C) The economy will self-correct as rising money wages decrease faster than rising prices. 
D) The economy will have excessive involuntary unemployment,
E)g., cyclical unemployment.

Quizplus · Accepted Answer

An expansionary gap occurs when the actual output of an economy is above its full potential output. This leads to a situation where there is a shortage of labor, driving up wages and prices. As firms compete for a limited pool of workers, they offer higher wages to attract workers, leading to an increase in money wages and real wages. As prices and wages rise, the purchasing power of money decreases, leading to higher inflation.

Suppose an Economy Is Experiencing an Expansionary Gap