If real GDP exceeds potential GDP, then the money wage rate ________, aggregate supply ________, and the price level ________.
A) rises; decreases; rises
B) falls; decreases; rises
C) rises; increases; falls
D) falls; increases; rises
E) does not change; increases; rises

Question

Quizplus · Accepted Answer

When real GDP exceeds potential GDP, the economy is operating above its full capacity, leading to upward pressure on wages as firms compete for scarce labor. This increase in the money wage rate causes aggregate supply to decrease because higher wages increase production costs. Consequently, the price level rises due to increased costs and demand pressures.

If Real GDP Exceeds Potential GDP, Then the Money Wage