Question
Question 20
Which of the following adjustments will most likely occur when output exceeds the economy’s long-run capacity?
(1) Lower interest rates will increase the economy’s long-run capacity and restore
equilibrium.
(2) The natural rate of unemployment will increase and, thereby, restore equilibrium.
Halls to the economy’s long-run capacity.
(4) Prices will decline, bringing actual output into balance with its potential.
(3)
(1)
(2) short-run aggregate supply until output
(2)
Which of the following adjustments will most likely occur when output exceeds the economy’s long-run capacity?
(1) Lower interest rates will increase the economy’s long-run capacity and restore
equilibrium.
(2) The natural rate of unemployment will increase and, thereby, restore equilibrium.
Halls to the economy’s long-run capacity.
(4) Prices will decline, bringing actual output into balance with its potential.
(3)
(1)
(2) short-run aggregate supply until output
(2)
Ask by Macdonald Spencer. in Cayman Islands
Mar 30,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
The most likely adjustment is that short-run aggregate supply will adjust until output aligns with the economy’s long-run capacity (Option 4).
Solution
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The Deep Dive
When output exceeds the economy’s long-run capacity, one common adjustment is that prices may rise due to increased demand and limited supply. This inflationary pressure tends to reduce real purchasing power and can eventually cool down the economy by diminishing consumption, leading to a more sustainable output level that aligns with long-run capacity.
In this scenario, the natural rate of unemployment may fluctuate as businesses respond to rising costs and adjustments in the labor market. Initially, lower unemployment can be seen with high demand for labor; however, as firms face higher operating costs, they may reduce hiring, leading to an increase in unemployment until the economy reaches a more balanced state.
