When output falls below full employment output, we expect that the:
A) wages and prices decrease as the short run aggregate supply curve shifts upward over time.
B) wages and prices decrease as short run aggregate supply curve shifts downward over time.
C) wages and prices increase as the long run aggregate supply curve shifts upward over time.
D) wages and prices decrease as the long run aggregate supply curve shifts downward over time.

Question

Quizplus · Accepted Answer

When output falls below full employment output, there is a surplus of goods in the economy, leading to downward pressure on prices. As a result, the short run aggregate supply curve (SRAS) shifts downward over time as firms adjust their prices and output levels. In the short run, wages may also decrease as firms reduce their production and lay off workers. Therefore, choice B is the best answer.

When Output Falls Below Full Employment Output, We Expect That