The Stock Market Boom of 2010
Imagine that in 2010 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
-Refer to Stock Market Boom 2010.In the short run what happens to the price level and real GDP?
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

If stock prices rise more than expected, people will feel wealthier and may increase their spending. This will cause an increase in aggregate demand, leading to an expansion of real GDP. However, this increase in demand may also lead to a temporary increase in prices, as producers may face capacity constraints and have to raise prices to meet the increased demand. Therefore, both the price level and real GDP will rise in the short run.