When prices of outputs in an economy become sufficiently hig

Solution

When current real GDP or output exceeds the potential real GDP in an economy then it creates inflationary pressure in the economy. This inflationary pressure compel the various constituents of economy to revise their inflationary expectations upward. Workers are an important constituents of economy and they also revise their inflation expectations upward. As workers expect higher inflation in future time period they demand higher wages to maintain their real income. As firms concede to demand for higher wages, cost of production of firms increases and their profitability declines. Fall in profitability prompts the firms to reduce production. Fall in production shifts the short-run aggregate supply curve leftwards. However, this leftward shift of SRAS curve remain continue till economy revert back to its level of potential real GDP.

Thus, in long-run, economy remains at its level of potential GDP and surge in output (current real GDP exceeding potential real GDP) remains a phenomena of short-run.

S, when prices of outputs in an economy become sufficiently high, causing production to exceed potential GDP, the result is that hyper-intense production will be unsustainable in the long-run.

Hence, the correct answer is option (C).