If the economy is operating at an output level beyond its full-employment capacity, which of the following would most likely direct the economy back to long-run equilibrium?
A) improvements in technology
B) a decrease in the real rate of interest
C) an increase in resource prices
D) a decrease in resource prices

Question

Quizplus · Accepted Answer

If the economy is operating beyond its full-employment capacity, it means that resources are being used at a level above what the economy can sustain in the long run. An increase in resource prices would lead to higher costs for firms and ultimately reduce their profitability, leading to a decrease in output and a movement towards the long-run equilibrium. The other options, such as improvements in technology or a decrease in the real rate of interest, may increase aggregate demand and exacerbate the problem of the economy operating beyond its full-employment capacity. A decrease in resource prices may also stimulate production in the short run, but would not necessarily lead to a movement towards long-run equilibrium.

If the Economy Is Operating at an Output Level Beyond