The following is a list of economic events:
1.A big cut in the price of imported oil.
2.An increase in the money supply.
3.An increase in labour productivity.
4.A decline in the GDP of the USA
5.A big rise in nominal wages.
-How does the economy eventually adjust to an inflationary gap?
A)The nominal wage and price levels will both increase.
B)The nominal wage and price level will both decrease.
C)The nominal wage level will decrease but the price level will increase.
D)The nominal wage level will increase but the price level will decrease.

Question

Quizplus · Accepted Answer

When there is an inflationary gap (when aggregate demand exceeds aggregate supply), prices tend to rise. With an increase in the money supply and a big rise in nominal wages, demand will further increase, leading to an increase in prices. This will eventually result in an increase in the nominal wage and price levels, helping to close the inflationary gap.

The Following Is a List of Economic Events