Suppose the current situation is such that the price level is 120,real GDP is $13 trillion,and GDP along the long-run aggregate supply curve is $12.6 trillion.What will take place to restore the long-run equilibrium?
A) The price level will fall until long-run aggregate supply increases to $13 trillion.
B) The price level will fall and money wage rates will rise until real GDP along the long-run aggregate supply curve is $13 trillion.
C) Money wage rates will rise until real GDP is $12.6 trillion.
D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $13 trillion.

Question

Quizplus · Accepted Answer

The economy is producing above its long-run potential (real GDP is $13 trillion, potential is $12.6 trillion), leading to upward pressure on wages. As money wage rates rise, production costs increase, reducing short-run aggregate supply until real GDP returns to the long-run equilibrium level of $12.6 trillion.

Suppose the Current Situation Is Such That the Price Level