Scenario 14-1
The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to the Scenario 14-1.In the short run,which of the following describes the changes that take place in the economy?
A)Both the price level and real GDP rise.
B)Both the price level and real GDP fall.
C)The price level rises and real GDP falls.
D)The price level falls and real GDP rises.

Question

Quizplus · Accepted Answer

When citizens become more optimistic about the future, they increase their spending, leading to an increase in aggregate demand. In the short run, this leads to a higher price level and an increase in real GDP as firms increase production to meet higher demand. Therefore, choice A is the correct answer. Note that in the long run, the economy will adjust, and the price level will return to its previous level, while the real GDP will remain higher.

Scenario 14-1 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Improved