An economy currently has an inflationary gap. An increase in the money wage rate will ________ the inflationary gap and ________ the price level.
A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

An increase in the money wage rate will increase production costs for businesses, leading to a decrease in aggregate supply. This shift can help close an inflationary gap by reducing the quantity of goods and services produced, potentially leading to higher prices as the cost of production increases.

An Economy Currently Has an Inflationary Gap