Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
A)Output will increase.
B)Prices will decline.
C)Unemployment will decline.
D)Wages will rise.
E)The exchange rate will rise.

Question

Quizplus · Accepted Answer

When the economy is operating above its potential GDP, it indicates an overheated economy where demand for goods and services exceeds the economy's capacity to produce. In such a scenario, employers compete for a limited pool of labor, leading to an increase in wages as they try to attract or retain workers. This wage increase is part of the automatic mechanism that helps cool down the economy and bring it back towards its potential GDP.

Suppose the Economy Is at a Short-Run Equilibrium GDP That