An economy experiencing an expansionary gap _____
A) operates in an environment in which labor shortages drive up money wages, real wages, and prices.
B) has an excess supply of labor due to rising money wages and prices.
C) will self-correct as money wages decrease faster than rising prices.
D) will experience rising money wages and prices but falling real wages.
E) will have excessive involuntary unemployment.

Question

Quizplus · Accepted Answer

An expansionary gap occurs when actual output exceeds potential output, leading to a tightening of resources, particularly labor. As the demand for labor increases, money wages, real wages, and prices rise, leading to a situation in which labor shortages drive up costs. This is known as an inflationary gap, and option A best describes this situation.

An Economy Experiencing an Expansionary Gap _____