Once decision makers fully adjust to an increase in prices,
A) the natural rate of unemployment will decline.
B) competitive forces will restore the usual relationship between product prices and costs.
C) producers' profits will exceed their normal level.
D) producers will expand output beyond the economy's potential.

Question

Quizplus · Accepted Answer

When decision makers fully adjust to an increase in prices, competitive forces will restore the usual relationship between product prices and costs. Producers will adjust their prices and production to meet the new demand and supply conditions, ultimately leading to a new equilibrium where prices and costs are in balance. This adjustment will prevent producers from expanding output beyond the economy's potential and will not lead to an increase in the natural rate of unemployment. While producers may temporarily enjoy higher profits due to the price increase, these profits will return to their normal level once the market adjusts.

Once Decision Makers Fully Adjust to an Increase in Prices