If an economy at potential GDP experiences a demand shock that shifts the aggregate demand curve rightward, there will be
A) an eventual leftward shift in the short-run aggregate supply curve.
B) unemployment below the natural rate.
C) upward pressure on money wage rates.
D) All of the above answers are correct.

Question

Quizplus · Accepted Answer

When an economy at potential GDP experiences a rightward shift in the aggregate demand curve, it initially leads to an increase in output and prices. This situation results in unemployment falling below the natural rate as firms hire more workers to meet the increased demand. Consequently, the higher demand for labor puts upward pressure on wages. Over time, as wages increase, the cost of production for firms also increases, leading to a leftward shift in the short-run aggregate supply curve as firms reduce output back towards the potential GDP. Thus, all of the given options are correct outcomes of the described scenario.

If an Economy at Potential GDP Experiences a Demand Shock