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Question
If the equilibrium output in an economy is more than the full employment output, which of the following correctly describes the situation?
Options
Demand is more than the output produced at full employment level; this is excess demand and prices rise in the long run
All factors are fully used at equilibrium and prices remain constant in the long run
Demand equals the output produced at full employment level and prices show no long-run change
Demand is not enough to employ all factors of production; this is deficient demand and prices fall in the long run
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Solution
When equilibrium output is more than full employment output, demand is more than the output produced at full employment level. This situation is called excess demand, and it leads to a rise in prices in the long run.
