If the economy is experiencing an expansionary gap,which of the following will occur in the long run?
A)Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
B)Workers will negotiate nominal wage increases that will shift the SRAS curve to the right.
C)Employers will negotiate lower nominal wages (relative to prices)that will shift the SRAS curve to the right.
D)Employers will negotiate lower nominal wages (relative to prices)that will shift the SRAS curve to the left.
E)Aggregate demand will fall because workers' incomes are rising.

Question

Quizplus · Accepted Answer

In the long run, workers will negotiate nominal wage increases due to their increased bargaining power resulting from a tight labor market. These nominal wage increases will eventually cause the SRAS curve to shift to the left, restoring equilibrium. This is because higher nominal wages increase production costs and reduce firms' profits, leading them to reduce output and shift the SRAS curve to the left.

If the Economy Is Experiencing an Expansionary Gap,which of the Following