If an economy at potential GDP experiences a demand shock that shifts the aggregate demand curve rightward, there will be

Question

Quizplus · Accepted Answer

When a demand shock shifts the AD curve rightward, it leads to an increase in output and employment in the short run. As the economy operates beyond its potential GDP, there will be a shortage of labor, leading to upward pressure on money wage rates (B). However, this increase in wages will eventually be incorporated into the production costs of firms, causing a leftward shift in the short-run aggregate supply curve. This process will continue until the economy returns to its potential GDP in the long run. Therefore, all the above choices are correct (D).

If an Economy at Potential GDP Experiences a Demand Shock