Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, then we would expect that in the short-run,
A)real GDP will rise and the price level might rise, fall, or stay the same.
B)real GDP will fall and the price level might rise, fall, or stay the same.
C)the price level will rise, and real GDP might rise, fall, or stay the same.
D)the price level will fall, and real GDP might rise, fall, or stay the same.

Question

Quizplus · Accepted Answer

A sharp increase in the minimum wage will increase firms' costs, which will reduce their profits and lead to a decrease in their willingness to hire workers. This will cause a decrease in employment and real GDP in the short-run. The increase in pessimism about future business conditions will likely reduce investment and aggregate demand, which will further decrease real GDP. The direction of the price level is uncertain because the decrease in aggregate supply will put upward pressure on prices, while the decrease in aggregate demand will put downward pressure on prices. Therefore, real GDP will fall and the price level might rise, fall, or stay the same.

Suppose the Economy Is in Long-Run Equilibrium