When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur?
A) The AD curve shifts rightward because the Fed decreases the money supply.
B) The SAS curve shifts leftward because the money wage rate rises.
C) The SAS curve shifts leftward because the money wage rate falls.
D) The AD curve shifts leftward because the money wage rate rises.

Question

Quizplus · Accepted Answer

When real GDP exceeds potential GDP, it puts upward pressure on wages as the labor market tightens. This leads to an increase in production costs for firms, which is reflected in a leftward shift of the Short-Run Aggregate Supply (SAS) curve due to rising money wage rates.

When the AD and SAS Curves Intersect at a Level