Exhibit 8-1
-Refer to Exhibit 8-2.Based on the given change,what word (rises or falls)should go in blank (5)and blank (6),respectively,to summarize the resulting impact on short run equilibrium?
A)rises;rises
B)falls;falls
C)rises;falls
D)falls;rises

Question

Exhibit 8-1 
-Refer to Exhibit 8-2.Based on the given change,what word (rises or falls)should go in blank (5)and blank (6),respectively,to summarize the resulting impact on short run equilibrium?
A)rises;rises 
B)falls;falls 
C)rises;falls 
D)falls;rises

Quizplus · Accepted Answer

An increase in government spending shifts the aggregate demand curve to the right, causing an increase in both real GDP and the price level in the short run. As a result, the equilibrium output (Y) increases, which causes an increase in the demand for labor, leading to a rise in wages and a rise in production costs. The increase in production costs causes a decrease in short run profits, leading to a decrease in the short run aggregate supply. Thus, the overall impact on short run equilibrium is that prices (P) rise and output (Y) rises as well initially due to the increase in government spending, but eventually, prices (P) fall and output (Y) falls due to the decrease in short run aggregate supply. Therefore, the blank (5) should be filled with "rises" and the blank (6) should be filled with "falls." Choice C is the correct answer.

Exhibit 8-1 -Refer to Exhibit 8-2.Based on the Given Change,what Word (Rises