An economy currently has a inflationary gap. An increase in the money wage rate will___________ the inflationary gap and___________ the price level.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase

Question

Quizplus · Accepted Answer

An increase in the money wage rate will increase the cost of production for firms, leading to a leftward shift of the short-run aggregate supply curve. This will decrease the inflationary gap, as output decreases and prices rise. Therefore, the correct choice is C, which states that the increase in money wage rate will decrease the inflationary gap and increase the price level.

An Economy Currently Has a Inflationary Gap