FIGURE 29-2 -Refer to Figure 29-2. Suppose an Inflationary Gap Has Opened

FIGURE 29-2
-Refer to Figure 29-2. Suppose an inflationary gap has opened and the economy is at E1. Which of the following statements best describes the movement of the economy from E1 to E2?

A) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada validates the demand shock, thus shifting the AD curve further to the right.
B) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada implements a contractionary monetary policy, shifting the AD curve to the left.
C) The inflationary gap causes an increase in the expectations of the future inflation. As a result, the AS curve shifts upward and the AD curve shifts to the right.
D) The inflationary gap generates excess demand for labour, which causes the AD curve to shift to the right. The adjustment process then shifts the AS curve upward.
E) The economyʹs adjustment process causes the economy to move from E1 to E2.