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Up2
Capacity utilization is at very high levels, nearing 90 percent, and companies are experiencing an inability to meet order delivery deadlines. In light of this, we would expect:
- A. a rightward movement along the aggregate supply curve to meet the demand.
- B. a rightward shift in the aggregate demand curve as firms increase
investment spending. - C. a leftward shift in the aggregate demand curve as consumers reduce
spending due to higher price levels.
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Up3
The correct answer is B.
Capacity utilization is the extent to which an enterprise uses its installed productive capacity. It is the relationship between output produced with the installed equipment and the potential output which could be produced with it if capacity was fully used.
The evidence from the US Federal Reserve and OECD countries indicates that as capacity utilization reaches 80 to 85 percent, the additional investment spending by firms shifts the aggregate demand curve to the right.
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