The price adjustments of a dynamic model are founded on the intuition that
A) upward pressure should be exerted on prices if actual GDP exceeds potential GDP.
B) downward pressure should be exerted on prices if actual GDP falls short of potential GDP.
C) downward pressure should be exerted on prices if unemployment in excess of the natural rate puts downward pressure on wages.
D) upward pressure should be exerted on prices if employment above potential employment portends upward pressure on wages.
E) all of the above.

Question

Quizplus · Accepted Answer

All the choices correctly describe the intuition behind price adjustments in a dynamic model. When actual GDP exceeds potential GDP, or when employment is above potential, it indicates an overheated economy which puts upward pressure on wages and thus prices. Conversely, if actual GDP is below potential or if unemployment exceeds the natural rate, it indicates slack in the economy, putting downward pressure on wages and prices.

The Price Adjustments of a Dynamic Model Are Founded on the Intuition