What is one likely effect of a sustained increase in production costs?

A sustained increase in production costs primarily leads to a decrease in aggregate supply. When production costs rise—due to factors like higher wages, increased prices for raw materials, or additional regulatory costs—producers find it more expensive to create goods and services. In response, businesses may reduce their output because they are unable to maintain previous levels of production at the new higher costs.

As production decreases, the overall supply of goods and services in the economy falls, which can lead to higher prices for consumers if demand remains unchanged. This relationship is rooted in the basic principles of supply and demand: when supply diminishes while demand remains steady, prices tend to rise. Understanding this dynamic is crucial for grasping how changes in production costs can impact the overall economy.

In this scenario, the other options do not align with the economic principles at play. For example, a sustained increase in production costs typically does not lead to higher employment rates, as companies may be compelled to cut back on hiring or even lay off employees to manage their higher operational costs. Similarly, increased production costs do not result in lower inflation rates; rather, they can contribute to inflation as prices rise in response to decreased supply. Lastly, higher production costs do not correlate with an increase in aggregate