The economy cannot remain indefinitely with real GDP greater than potential GDP because the money wage rate will
A)increase, shifting the LAS curve leftward.
B)decrease, shifting the SAS curve rightward.
C)increase, shifting the SAS curve rightward.
D)increase, shifting the SAS curve leftward.
E)decrease, shifting the LAS curve rightward.

Question

Quizplus · Accepted Answer

When real GDP is greater than potential GDP, it indicates an overheated economy. In such a scenario, the demand for labor increases, leading to an increase in the money wage rate. As wages increase, the cost of production for businesses goes up, which in turn reduces the quantity of goods and services that a firm is willing to supply at any given price level. This situation is represented by a leftward shift of the Short-Run Aggregate Supply (SAS) curve, not the Long-Run Aggregate Supply (LAS) curve, because it reflects short-term adjustments in the economy.

The Economy Cannot Remain Indefinitely with Real GDP Greater Than