In the short run ________.
A)inflation is negatively related to the output gap
B)if output rises above its potential level,the unemployment rate falls and firms will lower wages
C)if the labor market tightens,firms will raise prices more rapidly to keep up with upward wage pressures and inflation will ensue
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

In the short run, if the labor market tightens and there are upward wage pressures, firms may raise prices more rapidly to maintain their profit margins, which could lead to inflation. Option A is incorrect because in the short run, inflation is positively related to the output gap. Option B is incorrect because in the short run, an increase in output above potential level leads to lower unemployment and higher wages.

In the Short Run ________