When real GDP rises, we know that
A Prices have increased
B Output has increased
C Prices have fallen
D Output has fallen
The correct answer and explanation is :
The correct answer in this context would be C Prices have fallen.
Explanation:
When analyzing economic conditions, it’s important to consider the relationship between output and prices. In economics, output refers to the total production of goods and services in an economy, while prices represent the cost at which goods and services are exchanged.
The statement suggests a cause-and-effect relationship, and typically in many economic theories, including supply and demand, a reduction in output can result in changes in prices. In this case, the correct response is C Prices have fallen, because in a typical market scenario:
- Falling Output: When the output of goods and services in an economy falls, this can occur due to several reasons, such as reduced consumer demand, less production capacity, or external shocks to the supply chain. In this case, fewer goods are available for purchase in the market.
- Effect on Prices: The reduced output could result in a decrease in the overall supply of goods and services. If demand remains constant or increases slightly, this shortage can lead to a reduction in prices, especially if businesses try to clear out excess stock or there is less consumer willingness to pay due to economic concerns.
- Market Adjustments: In competitive markets, producers may lower prices to stimulate demand for the reduced output. Alternatively, if the economy is in a recession or facing other economic difficulties, overall demand for goods and services may also decrease, leading to lower prices as well.
While D Output has fallen is also a valid statement, it’s the outcome of reduced output that we typically analyze in terms of price changes. So, if output falls, prices often fall in response, unless other factors, such as rising demand or supply shocks, influence the situation. Therefore, the best choice here is C Prices have fallen.