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 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

The increase in optimism leads to an increase in aggregate demand, which leads to an increase in both the price level and real GDP in the short run. This is because firms will increase production and hire more workers to meet the increased demand.