If GDP is above potential output, then we expect to see
A) increasing wages, causing the short-run aggregate supply curve to shift up.
B) increasing wages, causing the short-run aggregate supply curve to shift down.
C) falling wages, causing the short-run aggregate supply curve to shift up.
D) falling wages, causing the short-run aggregate supply curve to shift down.

Question

Quizplus · Accepted Answer

When GDP is above potential output, it indicates an overheated economy where demand for labor is high, leading to increasing wages. This increase in production costs causes the short-run aggregate supply curve to shift up (left), as it becomes more expensive for firms to produce at every price level.

If GDP Is Above Potential Output, Then We Expect to See