When actual output is above potential output, over time:
A) nominal wages will increase, and the short-run supply curve will shift to the right.
B) nominal wages will increase, and the short-run supply curve will shift to the left.
C) the aggregate demand curve will shift to the right.
D) the short-run aggregate supply curve will shift to the right.

Question

Quizplus · Accepted Answer

When actual output is above potential output, there is upward pressure on nominal wages because firms have to pay more to attract workers due to the labor shortage. This increase in nominal wages leads to an increase in production costs, causing the short-run supply curve to shift to the left. As a result, prices increase and output falls back towards potential output. This process is known as the "Phillips Curve" or "wage-price spiral."

When Actual Output Is Above Potential Output, Over Time