Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later exceeds potential output, prices generally will begin to rise at
A) a rate of 4 percent.
B) a rate greater than 4 percent.
C) a rate less than 4 percent.
D) a rate of 0 percent.

Question

Quizplus · Accepted Answer

When the output exceeds potential output, the economy is said to be operating beyond full employment. This causes an increase in demand which leads to an increase in prices. Since the economy was already experiencing 4 percent inflation at full employment, the prices will begin to rise at a rate greater than 4 percent.

Suppose an Economy That Has Been Operating at Full Employment