Which statement(s)is (are)consistent with a positive relationship between inflation and the output gap?
A)If output rises above its potential level,the unemployment rate falls and firms will raise wages and prices more rapidly.
B)In the short run,the AS curve is upward sloping.
C)Through Okun's law,the negative relationship between the output and unemployment gaps allows the modern Phillips curve to be translated into the AS curve.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

All three statements are consistent with a positive relationship between inflation and the output gap. 
A) If output rises above its potential level, firms will face a tighter labor market and may increase wages and prices more rapidly, leading to higher inflation. 
B) In the short run, the AS curve is upward sloping, meaning that an increase in aggregate demand leads to both higher output and higher inflation. 
C) Okun's law suggests that there is a negative relationship between the output gap and the unemployment gap. This implies that as output rises above potential, unemployment falls and firms may have more pricing power, leading to higher inflation. By incorporating this relationship into the Phillips curve, we can derive the AS curve, which shows the positive relationship between inflation and the output gap.

Which Statement(s)is (Are)consistent with a Positive Relationship Between Inflation and the Output