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

At full employment, any increase in aggregate demand will lead to an inflationary gap as the economy is already producing at its maximum capacity. This increase in demand will cause prices to rise, leading to a leftward shift in the AS curve as the money wage rate rises.

The Economy Is at Full Employment