In the aggregate-demand/aggregate-supply model, what market adjustments cause th

Question

In the aggregate-demand/aggregate-supply model, what market adjustments cause the economy to return to its long-run capacity when output is temporarily greater than the economy's long-run potential output? Question 11 options:

a) Lower wage rates and resource prices reduce short-run aggregate supply

b) Lower interest rates increase aggregate demand and thereby stimulate output

c) Higher wage rates and resource prices reduce short-run aggregate supply

d) A decrease in the price level reduces aggregate demand

Explanation / Answer

ANs is c) Higher wage rates and resource prices reduce short-run aggregate supply

The self correction mechanism corrects inflationary gap through rise in wages and resource prices.

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