Question

According to mainstream business cycle​ theory, _______. A. the money wage rate is sticky and consequently if aggregate demand grows faster than potential​ GDP, an inflationary gap emerges B. the money wage rate is sticky and consequently if aggregate demand grows faster than potential​ GDP, a recessionary gap emerges C. in a business cycle​ expansion, short-run aggregate supply increases by more than aggregate demand D. the economy is always at full employment

Answer 1

Answer:

The correct answer is option A.

Explanation:

According to the mainstream business cycle theory, the potential GDP grows at a steady rate while the aggregate demand grows at a fluctuating rate. The money wage rate is considered to be sticky.  

So when aggregate demand increases more than the potential GDP, the supply is not able to increase as much as demand. This creates an inflationary gap in the economy.