Use the figure below to answer the following question.

Figure 26.3.4
-If real GDP is less than potential GDP,we would expect
A)the money wage rate to fall.
B)the money wage rate to rise.
C)potential GDP to increase.
D)potential GDP to decrease.
E)A and C.

Question

Use the figure below to answer the following question.
  
Figure 26.3.4
-If real GDP is less than potential GDP,we would expect
A)the money wage rate to fall. 
B)the money wage rate to rise. 
C)potential GDP to increase. 
D)potential GDP to decrease. 
E)A and C.

Quizplus · Accepted Answer

If real GDP is less than potential GDP, it means there is a recessionary gap which implies unemployment and excess supply in the economy. In such a situation, firms would face pressure to reduce costs, including lowering the wage rate. Therefore, we would expect the money wage rate to fall. The other options (B, C, D, and E) are incorrect because they do not explain the expected outcome of a recessionary gap.

Use the Figure Below to Answer the Following Question