Economic Output and Full-Employment Capacity

Excess Output and Full-Employment Capacity

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Question

When the output of an economy exceeds the economy's full-employment capacity, then

Answers

A. aggregate supply will increase until the economy can produce the output at the existing price level.

B. aggregate demand will decline until full-employment equilibrium is restored at a lower price level.

C. unemployment will exceed the economy's natural unemployment.

D. wages and prices will rise until full employment is restored at a higher price level.

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Explanations

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A. B. C. D.

Higher than full employment output will cause resource prices to rise (i.e. the price of labor and other prices in the economy) which will result in decreased demand for labor and a contraction of aggregate supply. The economy will toward its long run equilibrium output.

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