The economy is at full employment. If aggregate demand increases,
A)an inflationary gap is created and potential GDP increases to close the gap.
B)an inflationary gap is created and the AS curve shifts leftward as the money wage rate rises.
C)an inflationary gap is created and the AD curve shifts leftward.
D)a recessionary gap is created and the AS curve shifts leftward as the money wage rate falls.
E)a recessionary gap is created and the AS curve shifts leftward as the money wage rate rises.

Question

Quizplus · Accepted Answer

An increase in aggregate demand when the economy is at full employment creates an inflationary gap. This leads to upward pressure on prices and wages, causing the short-run aggregate supply (AS) curve to shift leftward as the money wage rate rises.

The Economy Is at Full Employment