When prices of outputs in an economy become sufficiently high, causing productio
ID: 1257612 • Letter: W
Question
When prices of outputs in an economy become sufficiently high, causing production to exceed potential GDP, the results is thatA) higher wages will encourage workers to take more leisure time B) the long run aggregate supply curve will shift to the right C) hyper-intense production will be unsustainable in the long run D) lower prices will lead to a lower quality of demand When prices of outputs in an economy become sufficiently high, causing production to exceed potential GDP, the results is that
A) higher wages will encourage workers to take more leisure time B) the long run aggregate supply curve will shift to the right C) hyper-intense production will be unsustainable in the long run D) lower prices will lead to a lower quality of demand When prices of outputs in an economy become sufficiently high, causing production to exceed potential GDP, the results is that
A) higher wages will encourage workers to take more leisure time B) the long run aggregate supply curve will shift to the right C) hyper-intense production will be unsustainable in the long run D) lower prices will lead to a lower quality of demand A) higher wages will encourage workers to take more leisure time B) the long run aggregate supply curve will shift to the right C) hyper-intense production will be unsustainable in the long run D) lower prices will lead to a lower quality of demand
Explanation / Answer
When current real GDP or output exceeds the potential real GDP in an economy then it creates inflationary pressure in the economy. This inflationary pressure compel the various constituents of economy to revise their inflationary expectations upward. Workers are an important constituents of economy and they also revise their inflation expectations upward. As workers expect higher inflation in future time period they demand higher wages to maintain their real income. As firms concede to demand for higher wages, cost of production of firms increases and their profitability declines. Fall in profitability prompts the firms to reduce production. Fall in production shifts the short-run aggregate supply curve leftwards. However, this leftward shift of SRAS curve remain continue till economy revert back to its level of potential real GDP.
Thus, in long-run, economy remains at its level of potential GDP and surge in output (current real GDP exceeding potential real GDP) remains a phenomena of short-run.
S, when prices of outputs in an economy become sufficiently high, causing production to exceed potential GDP, the result is that hyper-intense production will be unsustainable in the long-run.
Hence, the correct answer is option (C).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.