If an economy's resources are fully employed,

Question

Quizplus · Accepted Answer

If an economy's resources are fully employed, any attempt to increase production of goods and services will require additional resources, which will be more expensive to obtain. As a result, the aggregate supply curve (and thus the Phillips curve) will be steep, indicating that even a small increase in aggregate demand will result in a relatively large increase in the price level, rather than a significant increase in output. On the other hand, if resources were underemployed, the aggregate supply curve would be flatter, indicating that an increase in aggregate demand could lead to a larger increase in output with only a small increase in the price level. Option A is incorrect because reducing inflation would require reducing aggregate demand, which would reduce output and increase unemployment, not the other way around. Option B is also incorrect because a fully employed economy would have a steep Phillips curve, not a flat one. Therefore, the correct answer is option C.

If an Economy's Resources Are Fully Employed