Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an unexpected and sharp reduction in desired business investment expenditure.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is at its original level with a lower price level
B)real GDP and the price level both fall; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Question

Quizplus · Accepted Answer

In the short run, a sharp reduction in desired business investment expenditure would lead to a decrease in aggregate demand, causing both real GDP and the price level to fall. In the long run, the economy would adjust back to its potential output (original level of real GDP) but with a lower price level due to the initial decrease in aggregate demand and subsequent adjustments in the economy.

Suppose Canada's Economy Is in a Long-Run Equilibrium with Real