What happens to real wages and real output during the adjustment from an inflationary gap?
A)Real wages increase and real output increases.
B)Real wages decrease and real output decreases.
C)Real wages decrease and real output increases.
D)Real wages increase and real output decreases.

Question

Quizplus · Accepted Answer

During the adjustment from an inflationary gap, nominal wages tend to rise due to increased demand for labor, leading to higher real wages. As wages increase, production costs rise, causing firms to reduce output, leading to a decrease in real output.

What Happens to Real Wages and Real Output During the Adjustment