Which of the following best describes how an economy overcomes an expansionary gap in the long run if the government does NOT intervene?
A) In the long run, this gap will be closed by an increase in aggregate demand.
B) In the long run, this gap will close when resource suppliers negotiate lower resource payments.
C) In the long run, this gap will close when the short-run aggregate supply curve shifts rightward.
D) In the long run, this gap will close when resource suppliers negotiate higher resource payments.

Question

Which of the following best describes how an economy overcomes an expansionary gap in the long run if the government does NOT intervene?  
A) In the long run, this gap will be closed by an increase in aggregate demand. 
B) In the long run, this gap will close when resource suppliers negotiate lower resource payments. 
C) In the long run, this gap will close when the short-run aggregate supply curve shifts rightward. 
D) In the long run, this gap will close when resource suppliers negotiate higher resource payments.

Quizplus · Accepted Answer

In the long run, an expansionary gap, characterized by an economy operating above its potential output, leads to increased demand for resources, including labor. This increased demand results in resource suppliers, such as workers, negotiating for higher wages. As wages increase, the cost of production for businesses rises, which typically leads to a decrease in the short-run aggregate supply. This adjustment process helps to bring the economy back to its potential output level, effectively closing the expansionary gap without government intervention.

Which of the Following Best Describes How an Economy Overcomes