Question

The adjustment of the economy to potential real GDP in the long run from a level of real GDP above potential real GDP occurs as nominal wages​ ________, shifting the​ short-run aggregate supply curve to the​ ________.

A.

​fall; left

B.

​fall; right

C.

​rise; right

D.

​rise; left

Answer 1

In order to make the adjustment to the potential real GDP from above the potential real GDP, the nominal wages should rise which will shift the short run aggregate supply curve to the left and bringing back the economy to the potential level of real GDP. Because when the nominal wages increases it implies that the cost of production will increase which will decrease the profit share of the producers in the economy, and as a result of the increased cost of production, producers will cut down the level of productive activity which will shift the short run aggregate supply curve to the left. So, the right answer is option D.