Question

Which of the following explains why it’s possible to temporarily achieve output levels beyond the economy’s long-run potential?

a. In the long run, anticipated increases in the price level decrease resource costs relative to product prices increasing profit margins and incentivizing firms to increase output to boost their profits.

b. In the short run, unanticipated increases in the price level will increase resource costs relative to product prices making profit margins abnormally low and incentivizing firms to increase output to boost their profits.

c. In the short run, unanticipated increases in the price level decrease resource costs relative to product prices increasing profit margins and incentivizing firms to increase output to boost their profits.

d. In the short run, unanticipated increases in the price level decrease resource costs relative to product prices decreasing profit margins and discouraging firms to increase output.

Answer 1

Answer - option (c) In the short run, unanticipated increases in the price level decrease resource costs relative to product prices increasing profit margins and incentivizing firms to increase output to boost their profits. According to aggregate demand and supply model, an unanticipated increase in price level will encourage the producers to increase their output and an unanticipated increase in price will also increase the aggregate price level without increasing the production cost, but in relation to the increase in price level the cost of production is low or as the price increases the the resource cost gets lower or decreases, thus, producers will increase their output and sell them in a higher price increasing their profit margin.