If an economy is in short-run equilibrium such that the level of output is greater than the potential output:
A) nominal wages will rise after some time.
B) the economy is in long-run equilibrium.
C) the short run AS curve will shift right over time.
D) unemployment is much higher than its natural rate.

Question

Quizplus · Accepted Answer

In the short-run, when the level of output is greater than the potential output, the labor market is tight and there is upward pressure on nominal wages. As nominal wages rise, the short-run AS curve shifts leftward until the economy returns to its potential output in the long-run. Therefore, the correct option is A. B is incorrect because if the economy is in short-run equilibrium, it cannot be in long-run equilibrium. C is incorrect because if the short-run AS curve shifts right over time, it implies that the potential output has also increased, which contradicts the initial assumption that the output is greater than potential output. D is incorrect because if the actual output is greater than the potential output, it implies that the unemployment rate is below its natural rate rather than much higher.

If an Economy Is in Short-Run Equilibrium Such That the Level