If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect

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If there are continued negative supply shocks, such as annual wage increases for unionized workers, without any monetary validation, this would lead to upward pressure on costs for firms. As wages increase, firms will have to increase prices of their goods and services to maintain their profit margins, which leads to inflation. This would cause a decrease in demand for goods and services as prices rise, leading to unemployment as firms reduce their output. This would result in a shrinking output gap as the economy produces less, and consumers have less money to spend. Therefore, the best choice is D - rising unemployment until the wage increases cease, or are offset by other wage decreases.

If the Economy Is Faced with Continued Negative Supply Shocks