As firms raise output in response to rising aggregate demand,
A) resources become scarce, wages eventually rise, and a point is reached beyond which output cannot expand
B) they become increasingly efficient and are thus able to pass the cost savings on to consumers in the form of lower prices
C) real wages fall, interest rates rise, and consumers buy less
D) they hire fewer workers and substitute capital for labor
E) the level of nominal GDP falls, though real GDP rises

Question

Quizplus · Accepted Answer

As firms increase their output, they will require more resources, which may become scarce. Therefore, the prices of resources, including wages, are likely to rise, leading to cost-push inflation. At some point, there may not be enough resources to continue expanding output, and the economy will reach its maximum potential output level, also known as the full employment level. At this point, output cannot increase without causing inflation, indicating that the economy has reached its potential.

As Firms Raise Output in Response to Rising Aggregate Demand