Short run changes in the price level can affect real output because
A)supply curves of individual firms are upward sloping.
B)higher prices encourage technological change.
C)some production costs are relatively fixed.
D)the labour force increases as wages increase.

Question

Quizplus · Accepted Answer

In the short run, some production costs are relatively fixed, meaning that they do not change in response to changes in the level of output. Therefore, an increase in the price level may cause the nominal cost of production to increase, but the fixed costs remain the same. As a result, the profitability of producing additional output decreases, and some firms may reduce their output. This reduction in output can lead to a decrease in real output in the short run.

Short Run Changes in the Price Level Can Affect Real