If the price level does not fall or only falls very slowly, then the result will be a prolonged period of
A)inflation whenever supply increases.
B)production below potential GDP.
C)production above potential GDP.
D)rapid price increases when demand changes.

Question

Quizplus · Accepted Answer

If the price level does not fall or falls slowly, it means that there is a persistent increase in prices, which leads to inflation. This, in turn, reduces the purchasing power of money and leads to a reduction in the amount of goods and services that can be bought with the same amount of money. As prices continue to rise, it makes production more expensive for firms, leading them to produce below potential GDP. Hence, the best choice is B.

If the Price Level Does Not Fall or Only Falls