Refer to Figure 4, at Y1, the economy is in a long-run equilibrium. O has an inflationary gap. has a recessionary gap. has high unemployment.

Assume this economy is currently producing full-employment real GDP of B at a current price level of E.  What would happen in the short run if wages increase?

(Figure: Shifts of the AD–AS Curves) Use Figure: Shifts of the AD–AS Curves. A decrease in wages in the short run is illustrated by panel:

Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?   Select one:   a. Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed.   b. Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H.   c. In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed.   d. Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed.