Question

If actual output exceeds potential output for a prolonged period of time, we would eventually expect factor prices to:

A. rise, causing the SAS curve to shift up (to the left).
B. fall, causing the SAS curve to shift down (to the right).
C. rise, causing the LAS curve to shift out to the right.
D. fall, causing the LAS curve to shift in to the left.

Answer 1

The correct answer is option A.

Step-by-step explanation:

The potential output represents the full employment level of output. If the actual output is greater than the potential output level for a long time, it implies that the economy is experiencing inflation.

In the case of inflation, the general price level rises, so the factor prices will rise as well. This increase in factor prices will further increase the cost of production.

This increase in the cost of production will consequently cause the supply to decrease shifting the SAS or short-run aggregate supply curve to the left.