A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the
A)AS curve shifts to the right very rapidly.
B)AD curve shifts to the left rapidly.
C)AS curve shifts to the left only very slowly.
D)AS curve shifts to the left fairly rapidly.
E)none of the above-- the AS curve remains unchanged.

Question

Quizplus · Accepted Answer

When real GDP exceeds potential output, there is upward pressure on factor prices, such as wages and raw material prices. This leads to increased costs for firms, causing the AS curve to shift to the left. The speed at which the shift occurs depends on the extent of the excess demand in the economy. A gradual excess demand may lead to a slower shift, while a sudden excess demand may cause a more rapid shift to occur. Therefore, the AS curve shifts to the left fairly rapidly. Choice A is incorrect because a rightward shift in the AS curve implies an increase in potential output, which is not the case. Choice B is incorrect because a leftward shift in the AD curve would only exacerbate the situation by further increasing the excess demand in the economy. Choice C is also incorrect because a slow shift in the AS curve would not be consistent with the upward pressure on factor prices. Finally, choice E is incorrect because the AS curve must shift to reflect the changed economic conditions.

A Common Assumption Among Macroeconomists Is That When Real GDP