Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and a decrease in real GDP in the short run?
A) A decrease in health insurance premiums paid by firms raises the cost of employing labor
B) An increase in government transfer payments
C) An increase in the cost of a key input such as oil
D) A sharp fall in stock market prices

Question

Quizplus · Accepted Answer

An increase in the cost of a key input such as oil will increase production costs for firms, leading to a decrease in aggregate supply. With a given aggregate demand, this results in an increase in the price level and a decrease in real GDP in the short run. A decrease in health insurance premiums paid by firms (A) would lower production costs and increase employment, leading to an increase in real GDP in the short run. An increase in government transfer payments (B) would increase aggregate demand, leading to an increase in both the price level and real GDP in the short run. A sharp fall in stock market prices (D) may decrease consumption and investment spending, leading to a decrease in aggregate demand and lowering both the price level and real GDP in the short run.

Suppose the Economy Is Initially in Long-Run Equilibrium