If actual output exceeds potential output for a prolonged period of time, we would eventually expect factor prices to:
A)rise, causing the SAS curve to shift up (to the left).
B)fall, causing the SAS curve to shift down (to the right).
C)rise, causing the LAS curve to shift out to the right.
D)fall, causing the LAS curve to shift in to the left.

Question

Quizplus · Accepted Answer

When actual output exceeds potential output for a prolonged period, it indicates that resources are being used beyond their sustainable capacity, leading to increased demand for these resources. This increased demand typically results in higher factor prices (such as wages and rents), which in turn causes the short-run aggregate supply (SAS) curve to shift up (or to the left), as it becomes more costly for firms to produce at every price level.

If Actual Output Exceeds Potential Output for a Prolonged Period