If there is an inflationary gap, nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium.
A) fall; aggregate demand; left
B) rise; aggregate demand; right
C) fall; short-run aggregate supply; right
D) rise; short-run aggregate supply; left

Question

Quizplus · Accepted Answer

In an inflationary gap, there is excess demand in the economy, causing prices to rise. As a result, nominal wages also tend to rise to keep up with inflation. This results in a shift of the short-run aggregate supply curve to the left, as the cost of production increases for firms. Thus, the correct option is D, where nominal wages rise and the short-run aggregate supply curve shifts to the left until the economy reaches long-run equilibrium.

If There Is an Inflationary Gap, Nominal Wages _____, and the _____

If There Is an Inflationary Gap, Nominal Wages _, and the _