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Figure: Output Gap
-(Figure: Output Gap) Look at the figure Output Gap. If the economy is at Y₂ because of contractionary monetary policy and no further policy is implemented, in the long run nominal wages will _____ and shift the short-run aggregate supply curve to the _____, which will _____ real output.

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Use the following to answer questions :
Figure: Output Gap

-(Figure: Output Gap) Look at the figure Output Gap. If the economy is at Y₂ because of contractionary monetary policy and no further policy is implemented, in the long run nominal wages will _____ and shift the short-run aggregate supply curve to the _____, which will _____ real output.

Quizplus · Accepted Answer

In the long run, if the economy is below potential output (Y2), nominal wages will decrease due to lower demand for labor. This decrease in wages will reduce production costs, shifting the short-run aggregate supply curve to the right, which will increase real output back towards potential output.

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