Final answer:
In the long run, input prices will increase due to higher wages from labor demand, leading to a decrease in output as the economy self-corrects back to full employment output, with an inflationary increase in the price level.
Step-by-step explanation:
In the long run, input prices will increase and output will fall, aligning with option (a) of the provided choices. The scenario given describes a situation where short-run equilibrium output is above full employment output, which typically leads to an increased demand for labor. This increased labor demand results in higher wages, as employers compete for a limited number of workers.
As wages are a significant component of input costs, this leads to an increase in overall input prices. Ultimately, this brings about a new long-run equilibrium where the real GDP output aligns with potential GDP, but at a higher price level. This adjustment mechanism is essential to the neoclassical view where the economy self-corrects any short-run deviations from potential output.