An economy experiencing an expansionary gap
A)operates in an environment in which labor shortages drive up money wages,real wages,and prices
B)results in an excess supply of labor due to rising money wages and prices
C)will self-correct as rising money wages decrease faster than rising prices
D)will experience rising money wages and prices but falling real wages
E)will have excessive involuntary unemployment (e.g.,cyclical unemployment)

Question

Quizplus · Accepted Answer

An economy experiencing an expansionary gap has a level of output that exceeds the potential output. As a result, there is an excess demand for goods and services. This leads to increased demand for labor, which causes labor shortages. The shortage of labor drives up money wages, real wages, and prices. Therefore, choice A is the correct answer.

An Economy Experiencing an Expansionary Gap