If the general level of prices is lower than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?
A) an economic boom
B) highly attractive profit margins
C) output less than the economy's long-run potential
D) a sharp increase in imports

Question

Quizplus · Accepted Answer

If the general level of prices is lower than anticipated, it means that the cost of inputs has also decreased. Therefore, firms will be able to produce goods at a lower cost, leading to lower prices of finished goods. However, this does not necessarily lead to an economic boom or highly attractive profit margins. In fact, if prices are too low, firms may not earn enough profit to cover their fixed costs and may even reduce output if demand is too low. A sharp increase in imports is also unlikely as businesses will prefer to produce goods domestically to take advantage of lower input costs.

If the General Level of Prices Is Lower Than Business