The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion. TABLE 24-1 Refer to Table 24-1.Which of the following statements explains why wages are rising in Economy E?
A)The inflationary gap generates lower profits for firms because workers are demanding higher wages.
B)The inflationary gap generates excess demand for labour,which causes wages to rise.
C)The aggregate supply curve is shifting to the right,which is causing wages to rise.
D)The aggregate demand curve is shifting to the right,causing wages to rise.
E)Potential output is rising,putting upward pressure on wages.

Question

The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion.  TABLE 24-1 Refer to Table 24-1.Which of the following statements explains why wages are rising in Economy E?
A)The inflationary gap generates lower profits for firms because workers are demanding higher wages. 
B)The inflationary gap generates excess demand for labour,which causes wages to rise. 
C)The aggregate supply curve is shifting to the right,which is causing wages to rise. 
D)The aggregate demand curve is shifting to the right,causing wages to rise. 
E)Potential output is rising,putting upward pressure on wages.

Quizplus · Accepted Answer

In Economy E, there is an inflationary gap as the actual GDP is above the potential output. This generates excess demand for labour, which causes wages to rise. This is because firms need to attract workers to produce more output, and thus they are willing to pay higher wages to do so.

The Table Below Shows Data for Five Economies of Similar