-Refer to the above diagram.Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q_f.In the long run,an increase in the price level from P₂ to P₃ will: A) increase real output from Q_f to Q₂. B) change aggregate supply from AS₂ to AS₁. C) decrease real output from Q₂ to Q₁. D) not change the level of real output.

Question

Quizplus · Accepted Answer

In the long run, the economy operates at full employment, and real output remains at Q_f despite changes in the price level. Nominal wages and prices adjust, but real output does not change.

-Refer to the Above Diagram