We observe an increase in the price level and a decrease in real GDP. Which of the following is a possible explanation?
A)an increase in expected future profits
B)an increase in expected future income
C)an increase in factor prices
D)an increase in the quantity of capital
E)an increase in the quantity of money

Question

Quizplus · Accepted Answer

An increase in factor prices can lead to higher production costs, causing firms to reduce output (decreasing real GDP) while passing on the higher costs to consumers, resulting in an increase in the price level.

We Observe an Increase in the Price Level and a Decrease