In a short-run macroeconomic equilibrium, potential GDP exceeds real GDP. If aggregate demand does not change, then the
A) short-run aggregate supply curve will shift rightward as the money wage rate falls.
B) short-run aggregate supply curve will shift leftward as the money wage rate rises.
C) long-run aggregate supply curve will shift leftward as the money wage rate rises.
D) long-run aggregate supply curve will shift leftward as the money wage rate falls.

Question

Quizplus · Accepted Answer

In a situation where potential GDP exceeds real GDP, there is slack in the economy, indicating that not all resources are fully utilized, particularly labor. Over time, this slack in the economy puts downward pressure on wages. As wages decrease, production costs for firms also decrease, making it more profitable for them to increase output. This adjustment mechanism leads to a rightward shift in the short-run aggregate supply (SRAS) curve as the economy moves towards its potential GDP.

In a Short-Run Macroeconomic Equilibrium, Potential GDP Exceeds Real GDP