In the short-run, an increase in the average price level in the economy will cause:
A) demand for a good to increase but total production to decline.
B) profits to rise and thus, total production to increase.
C) interest rates to fall and thus, total production to decline.
D) input costs to fall and thus, total production to rise.
E) input costs to fall and thus, total production to decline.

Question

Quizplus · Accepted Answer

An increase in the average price level in the economy can lead to higher profits for firms as they sell their goods and services at higher prices. This increase in profitability can incentivize firms to expand production to take advantage of the higher prices, leading to an increase in total production.

In the Short-Run, an Increase in the Average Price Level