If profits are high because the price level rose,
A)it is likely the result of an increase in the real wage rate.
B)new businesses open and the quantity of real GDP supplied increases.
C)business failures rise and the quantity of real GDP supplied increases.
D)potential GDP must be decreasing.
E)the AS curve shifts leftward.

Question

Quizplus · Accepted Answer

When the price level rises, businesses can charge more for their goods and services and therefore experience higher profits. This would incentivize new businesses to enter the market, increasing the quantity of real GDP supplied. Option A is incorrect because an increase in the real wage rate would actually decrease profits. Option C is incorrect because an increase in business failures would decrease the quantity of real GDP supplied. Option D is incorrect because high profits suggest that actual GDP is above potential GDP. Option E is incorrect because a leftward shift in the AS curve would lead to lower profits, not higher ones.

If Profits Are High Because the Price Level Rose