If short-run equilibrium GDP is above potential GDP, prices will eventually rise.

Question

Quizplus · Accepted Answer

When short-run equilibrium GDP is above potential GDP, there is excess demand in the economy which leads to upward pressure on prices. As firms try to meet the higher demand, they may increase prices to limit demand and prevent shortages. Eventually, higher prices will reduce aggregate demand and bring the economy back to long-run equilibrium at potential GDP.

If Short-Run Equilibrium GDP Is Above Potential GDP, Prices Will