Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
A) Prices will decline, bringing actual output into balance with its potential.
B) The natural rate of unemployment will increase and, thereby, restore equilibrium.
C) Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
D) Lower interest rates will increase the economy's long-run capacity and restore equilibrium.

Question

Quizplus · Accepted Answer

When output exceeds the economy's long-run capacity, higher resource prices and costs due to increased demand for resources inevitably lead to an increase in short-run aggregate supply. As a result, output will fall to the economy's long-run capacity, restoring equilibrium. Prices will not necessarily decline in this scenario, and lower interest rates will not increase the economy's long-run capacity. The natural rate of unemployment will only increase if the economy experiences a negative shock outside of its control.

Which of the Following Adjustments Will Most Likely Occur When