Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and 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

A sharp fall in stock market prices can lead to a decrease in consumer wealth and confidence, reducing consumption and investment, which decreases aggregate demand, leading to a lower price level and real GDP in the short run.

Suppose the Economy Is Initially in Long-Run Equilibrium