When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur?
A) The AD curve shifts leftward because the money wage rate rises.
B) The AD curve shifts rightward because the Fed decreases the money supply.
C) The SAS curve shifts leftward because the money wage rate rises.
D) The AS curve shifts leftward because the money wage rate falls.

Question

Quizplus · Accepted Answer

When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, the economy is in a state of short-run equilibrium. In this situation, the SAS curve shifts leftward because the money wage rate rises due to a shortage of labor and other resources. This leads to higher production costs, causing the SAS curve to shift leftward. As a result, the equilibrium level of real GDP decreases, and the price level rises. Therefore, choice C is the best answer.

When the AD and SAS Curves Intersect at a Level