Which of the following is true regarding the closing of a contractionary gap?
A)The only way for the gap to close is for nominal wages to rise.
B)Such a gap could be closed if the nominal wage grew more slowly over time than the price level.
C)Once the economy falls into a contractionary gap,only a strong reduction in aggregate demand could close the gap.
D)Inflation eventually ends contractionary gaps.
E)Nominal wages and real wages should rise.

Question

Quizplus · Accepted Answer

A contractionary gap occurs when real GDP is below potential GDP, leading to high unemployment and low inflation. One way to close this gap is for demand to increase, which could happen if the nominal wage grows more slowly than the price level. This would lower production costs and increase aggregate supply, which could lead to higher output and employment levels. Option A is not correct because nominal wages rising would increase production costs and decrease the aggregate supply, making the problem worse. Option C is not correct because reducing aggregate demand would exacerbate the contractionary gap. Option D is not correct because inflation is a result of excess demand and may worsen the situation. Option E is not completely wrong, but real wages need not increase for the gap to close.

Which of the Following Is True Regarding the Closing of a Contractionary