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Figure: Aggregate Supply
-(Figure: Aggregate Supply) Refer to Figure: Aggregate Supply. If the economy is at point E, nominal wages will _____, and the short-run aggregate supply curve will shift _____ until actual potential is _____ potential output.
A) increase; left; equal to
B) increase; right; greater than
C) decrease; right; equal to
D) decrease; right; less than

Question

Use the following to answer questions:
Figure: Aggregate Supply 
-(Figure: Aggregate Supply) Refer to Figure: Aggregate Supply. If the economy is at point E, nominal wages will _____, and the short-run aggregate supply curve will shift _____ until actual potential is _____ potential output.
A) increase; left; equal to 
B) increase; right; greater than 
C) decrease; right; equal to 
D) decrease; right; less than

Quizplus · Accepted Answer

At point E, the economy is producing above its potential output, leading to increased demand for labor and thus higher nominal wages. As wages increase, production costs for businesses rise, causing the short-run aggregate supply (SRAS) curve to shift left until the economy's actual output equals its potential output.

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