If an expansionary policy pushes output beyond the full employment level of GDP:

Question

Quizplus · Accepted Answer

If output is pushed beyond the full employment level of GDP, it means that resources are being used at a rate higher than their potential. This leads to an increase in production costs which eventually results in a decrease in profitability. The producers will start to increase their prices to boost their margins, which will increase the aggregate price level, leading to inflation. In the long run, this will cause the short-run aggregate supply to shift to the left, leading to an overall decrease in the level of output.

If an Expansionary Policy Pushes Output Beyond the Full Employment