Starting from short-run equilibrium,the following occurs: labor productivity rises and individuals expect higher (future)incomes.What is the effect on the price level and Real GDP in the short run?
A) Real GDP falls and the price level necessarily rises.
B) Real GDP rises and the effect on the price level cannot be determined.
C) Real GDP rises and the price level necessarily falls.
D) Real GDP falls and the effect on the price level cannot be determined.
E) Real GDP rises and the price level necessarily rises.

Question

Quizplus · Accepted Answer

An increase in labor productivity boosts the economy's capacity to produce goods and services, leading to a potential increase in Real GDP. Expectations of higher future incomes can increase current consumption, further stimulating production. The effect on the price level is ambiguous because the increase in supply (from higher productivity) could lower prices, while increased demand (from higher income expectations) could raise them.

Starting from Short-Run Equilibrium,the Following Occurs: Labor Productivity Rises and Individuals