If an economy's actual GDP exceeds its potential GDP,_____.
A)wages and prices must fall
B)self-correcting forces will shift the SRAS curve to the left
C)self-correcting forces will shift the AD curve to the left
D)inflation will occur when AD shifts to the left
E)unemployment is likely to be unusually high

Question

Quizplus · Accepted Answer

When an economy's actual GDP exceeds its potential GDP, it indicates an overheated economy where demand outstrips supply, leading to inflationary pressures. Self-correcting mechanisms in the economy, such as increased wages and input costs, will eventually shift the short-run aggregate supply (SRAS) curve to the left, reducing output and increasing prices to bring the economy back towards its potential GDP.

If an Economy's Actual GDP Exceeds Its Potential GDP,_____