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 SAS curve shifts leftward because the money wage rate rises.
B) The AD curve shifts leftward because the money wage rate rises.
C) The AD curve shifts rightward because the Fed decreases the money supply.
D) The AS curve shifts leftward because the money wage rate falls.

Question

Quizplus · Accepted Answer

In this scenario, the economy is in an inflationary gap where output is above potential and resources are fully employed. This puts upward pressure on prices as firms compete for limited resources, causing the money wage rate to rise. As a result, the SAS curve shifts leftward as production costs increase, leading to a decrease in real GDP and a decrease in price level. Choice B is incorrect as the AD curve does not shift leftward due to a rise in money wage rate. Choice C is incorrect as there is no indication that the Fed is decreasing the money supply. Choice D is incorrect as a fall in money wage rate would shift the SAS curve to the right.

When the AD and SAS Curves Intersect at a Level