If the price level in an economy turns out to be higher than that expected by workers and firms, firms _____
A) increase the quantity supplied more than the economy's potential output.
B) decrease the quantity supplied less than the economy's potential output.
C) produce the quantity supplied the same as the economy's potential output.
D) decrease the quantity supplied.
E) a recessionary gap develops.

Question

Quizplus · Accepted Answer

When the price level in an economy is higher than expected by workers and firms, firms are likely to increase the quantity supplied because they can sell their products at higher prices, which can lead to profits above their initial expectations. This does not necessarily mean the economy's output exceeds its potential, but it indicates a short-term increase in production to take advantage of higher prices.

If the Price Level in an Economy Turns Out to Be