Suppose That an Economy Is Initially Producing at the Full-Employment

question 137

Multiple Choice

Suppose that an economy is initially producing at the full-employment level of output. Now suppose there is a reduction in the money supply. Other things being equal we can expect

• A) supply-side inflation.
• B) demand-side inflation.
• C) cost-pull inflation.
• D) deflation.

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Definitions:

ATC

Average Total Cost, the total cost of production divided by the number of units produced, often used in economics to analyze production efficiency.

AVC

Average Variable Cost, which is the total variable cost divided by the quantity of output produced, representing the variable cost per unit of output.

Economies Of Scale

They refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Pin Factory

Illustration by Adam Smith in "The Wealth of Nations" on how division of labor increases productivity, using a pin factory as an example.