If an economy operates at a short-run equilibrium output that exceeds its long-run capacity, which of the following will be most likely to direct the economy toward full employment?
A) Improvements in technology will shift the LRAS curve to the right.
B) Resource prices will increase, causing the SRAS curve to shift to the left.
C) The unemployment rate will increase, causing the economy's aggregate supply curve to shift to the right.
D) Interest rates will decline, shifting the aggregate demand curve to the right.

Question

Quizplus · Accepted Answer

When an economy operates at a short-run equilibrium output that exceeds its long-run capacity, it is producing at a level that cannot be sustained in the long run. As a result, the economy will experience increasing resource costs including wages, raw materials, and energy. This will cause the short-run aggregate supply curve to shift upward and leftward (to a lower level of output), leading to a new equilibrium at a lower level of output that is closer to the long-run capacity. Therefore, resource prices will increase, causing the SRAS curve to shift to the left.

If an Economy Operates at a Short-Run Equilibrium Output That