An important assumption in the AD/AS macro model is that when real GDP exceeds potential output,factor prices rise and the
A)AS curve shifts to the left.
B)AD curve shifts to the right.
C)AS curve shifts to the right very rapidly.
D)AD curve shifts to the left rapidly.
E)None of the above - the AS curve remains unchanged.

Question

Quizplus · Accepted Answer

When real GDP exceeds potential output, it indicates an overheating economy where demand outstrips supply, leading to increased factor prices (such as wages and raw materials). This increase in production costs causes the Aggregate Supply (AS) curve to shift to the left, reflecting a decrease in the total quantity of goods and services that producers are willing to supply at each price level.

An Important Assumption in the AD/AS Macro Model Is That