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If aggregate demand rises but the economy is at full capacity, why may pressure come on prices?

Answer and explanation

Correct answer: Because output may not increase much immediately

At full capacity, available resources such as labour, machines and productive facilities are already being used extensively. If aggregate demand rises further, firms may be unable to increase real output quickly. The excess demand then bids up the prices of goods, services and production factors, creating inflationary pressure rather than a large increase in physical output.

Related tags

Aggregate-DemandFull-CapacityPrice-LevelGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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