Suppose Canada's economy is in a long- run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, _ . In the long run, _ .
A)real GDP and the price level both rise; real GDP is above its original level with a higher price level
B)real GDP falls and the price level rises; real GDP is below its original level with a higher price level
C)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
D)real GDP and the price level both fall; real GDP is at its original level with a lower price level
E)real GDP and the price level both rise; real GDP returns to its original level with a higher price level

Question

Quizplus · Accepted Answer

In the short run, a reduction in investment decreases aggregate demand, leading to lower real GDP and a lower price level. In the long run, the economy self-corrects, and real GDP returns to its potential level, but with a lower price level.

Suppose Canada's Economy Is in a Long- Run Equilibrium with Real