As the unemployment rate decreases in response to the economy moving toward capacity output, the aggregate price level

Question

Quizplus · Accepted Answer

As unemployment decreases and the economy moves closer to capacity output, there is less slack in the labor market and firms may need to increase wages to attract workers. This ultimately leads to an increase in production costs for firms and they may pass on these higher costs to consumers in the form of higher prices, leading to a rise in the aggregate price level.

As the Unemployment Rate Decreases in Response to the Economy