Suppose the economy is at full employment, and consumers spend more than usual. In the short run, output will _____; in the long run, output will _____.

Question

Quizplus · Accepted Answer

At full employment, the economy is producing at its maximum capacity, so an increase in consumer spending will result in an increase in demand for goods and services. This will cause an increase in output in the short run, as firms respond to the increased demand by ramping up production. However, in the long run, an increase in aggregate demand will lead to higher prices and wages, which will cause firms to increase production costs and potentially reduce their profit margins. This will cause output to remain unchanged in the long run.

Suppose the Economy Is at Full Employment, and Consumers Spend