If an economy's actual GDP exceeds its potential GDP, _____
A)wages and prices must fall.
B)self-correcting forces will shift the SRAS curve to the left.
C)self-correcting forces will shift the AD curve to the left.
D)inflation will occur when AD shifts to the left.
E)unemployment is likely to be unusually high.

Question

Quizplus · Accepted Answer

When an economy's actual GDP exceeds its potential GDP, it indicates an overheated economy where demand outstrips supply, leading to inflationary pressures. Self-correcting mechanisms, such as an increase in wages and input costs due to high demand, will eventually shift the short-run aggregate supply (SRAS) curve to the left, bringing the economy back towards its potential GDP. This process helps to moderate the economy by reducing the output and increasing prices, thus cooling down the demand.

If an Economy's Actual GDP Exceeds Its Potential GDP, _____