If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:
A)wages rise, unit costs rise, and the AS curve shifts leftward.
B)wages fall, unit costs fall, and the AS curve shifts rightward.
C)wages fall, unit costs rise, and the AS curve shifts leftward.
D)wages fall, unit costs fall, and the AD curve shifts rightward.
E)wages do not adjust, but the AD curve shifts to the right.

Question

Quizplus · Accepted Answer

In an inflationary output gap situation, the economy is producing above its potential output level, leading to rising prices and a need for adjustment. As wages rise due to higher demand for labor, unit costs also rise, which leads to a leftward shift of the aggregate supply (AS) curve. This shift means that firms are producing less than before at any given price level, and thus price levels rise further until the economy settles at a new equilibrium.

If the Economy Is Experiencing an Inflationary Output Gap, the Adjustment