Consider the AD/AS Model Below with a Constant Rate of Inflation

question 38

Multiple Choice

Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.
FIGURE 29-1
-Refer to Figure 29-1. Assume there are no demand or supply shocks present in this analysis. What explains the movement of the AS curve from AS0 to AS1 to AS2 and so on?

• A) unit costs are rising due to excess demand for labour
• B) expectations of inflation are causing wage costs to rise continually
• C) unit costs are rising because real wages are rising faster than nominal wages
• D) expectations of inflation are causing a perpetual inflationary output gap
• E) the AS curve shifts up as potential GDP Y*) is continuously rising

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