Question

The economy experiences an increase in the price level and a decrease in real domestic output. what is a likely explanation?

a. government expenditures decreased
b. business taxes have decreased
c. productivity has increased
d. resource prices have increased

Answer 1

The correct answer is option d. resource prices have increased.

Step-by-step explanation:

The scenario in question, where the economy is experiencing an increase in the price level and a decrease in real domestic output, is likely explained by an increase in resource prices. Here's a step-by-step explanation:

1. Increased resource prices make production more expensive for businesses.
2. This increase in costs leads to a decrease in supply, shifting the aggregate supply (AS) curve to the left.
3. As the AS curve shifts left, it results in a higher price level and lower quantity of goods and services produced, which is a decrease in real domestic output.

Option 'd' resource prices have increased aligns with this explanation as businesses facing higher input costs often reduce output and raise prices to maintain profit margins, resulting in the observed economic condition.