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.
Frequently asked questions
What is the correct answer to this question?
Because output may not increase much immediately
Why is this the correct answer?
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.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
