If input prices adjusted just as quickly as output prices, the profit effect leading to an increase in RGDP supplied would disappear.

Question

Quizplus · Accepted Answer

The profit effect refers to the increase in RGDP supplied that occurs when prices of outputs increase faster than input prices. If input prices adjusted just as quickly as output prices, there would be no profit effect, as there would be no incentive for firms to produce more output. Therefore, the profit effect would disappear.

If Input Prices Adjusted Just as Quickly as Output Prices