The table below shows several macroeconomic situations, each with a given amount of excess demand (or supply) for labour and a level of inflation expectations. Both are expressed in percentage per year. For example, in Case A excess demand for labour is pushing wages up by 4 percent per year, and expected inflation is pushing wages up by 3 percent per year.

a. For each case, identify whether there is an inflationary or a recessionary output gap.

b. For each case, what is the total effect on nominal wages? Fill in the third column.

c. For each case, in which direction is the AS curve shifting (up or down)? Fill in the last column.

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Total Excess Inflation Wage Case Demand Expectations Change AS Shift ABCDE +4 +3 +4 0 0 +3 -3 0 -3 +4