The economy is at potential GDP when people correctly anticipate an increase in government expenditure on goods and services. If the money wage rate adjusts immediately, then

Question

Quizplus · Accepted Answer

DWhen the economy is at potential GDP and people correctly anticipate an increase in government expenditure, the immediate adjustment of the money wage rate ensures that real GDP remains at its potential level. This adjustment prevents the economy from overheating and maintains the stability of the price level. As the money wage rate adjusts to the anticipated increase in government spending, it does so in a manner that maintains the real wage rate, preventing inflationary pressures and keeping real GDP at its potential level. This scenario reflects an efficient response by the labor market to anticipated economic policies, ensuring that the economy remains stable without deviating from its potential output.

The Economy Is at Potential GDP When People Correctly Anticipate