Question

When actual output exceeds potential, firms have an easy time keeping production in line with the high demand. Firms therefore lower their prices by more than the usual amount in an attempt to cover increased production costs. When actual output falls below potential, firms easily keep production in line with the high demand. Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs. When actual output exceeds potential, firms struggle to keep production in line with the high demand. Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs. When actual output exceeds potential, firms struggle to keep production in line with the high demand. Firms therefore lower their prices with decreased production costs.

A. True
B. False

Answer 1

Answer: When actual output exceeds potential

Firms raise their prices by more than the usual amount in an attempt to cover increased production costs.

Explanation: The price level rises because employers have to raise wage rates to entice more people into the labor market and employers have to pay more for other inputs that become more expensive to produce.