Refer to the following graphs. Which of the following statements best describes

Question

Refer to the following graphs. Which of the following statements best describes the supply side of Economy A? Click the icon to view the AD/AS graphs. Firms are producing well below their capacity and are willing to produce more output with no increase in price. Firms are producing well below their capacity and are willing to produce more only if prices rise. Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. Unit costs are rising, but firms are able to produce more output because there is excess capacity in the economy.

Explanation / Answer

Option (B).

In economy A, aggregate supply is horizontal, which means that firms can produce any amount of output (real GDP) at a specific price. So, firms have enough excess capacity and currently, they are producing below their capacity. Firms will increase output only at a higher price.

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