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, real GDP is currently above potential output, indicating an inflationary gap. This generates excess demand for labour, causing wages to rise as firms compete for workers. Therefore, choice B is the correct answer. Choices A and D are incorrect because they do not explain how the inflationary gap is affecting wages in Economy E. Choice C is incorrect because a rightward shift of the aggregate supply curve would lead to a decrease, rather than an increase, in wages. Choice E is incorrect because potential output is assumed to remain constant in this scenario.

The Table Below Shows Data for Five Economies of Similar