Suppose the current situation is such that the price level is 120, real GDP is $17 trillion, and GDP along the long-run aggregate supply curve is $16.6 trillion. What will take place to restore the long-run equilibrium?
A) The price level will fall until long-run aggregate supply increases to $17 trillion.
B) The price level will fall and money wage rates will rise until real GDP along the long-run aggregate supply curve is $17 trillion.
C) Money wage rates will rise until real GDP reaches $16.6 trillion.
D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $17 trillion.

Question

Quizplus · Accepted Answer

In this scenario, the economy is producing above its long-run potential (real GDP is above the long-run aggregate supply), which typically leads to upward pressure on wages as firms compete for a limited labor supply. As money wage rates rise, the cost of production increases, leading firms to reduce output, moving the economy back towards its long-run equilibrium at $16.6 trillion.

Suppose the Current Situation Is Such That the Price Level