Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and real GDP in the short run?
A) A decrease in health insurance premiums paid by firms raises the cost of employing labor
B) An increase in government transfer payments
C) An increase in the cost of a key input such as oil
D) A sharp fall in stock market prices

Question

Quizplus · Accepted Answer

An increase in government transfer payments would increase aggregate demand and shift the AD curve to the right, causing an increase in both the price level and real GDP in the short run. Choice A would decrease costs and increase employment, causing a leftward shift in the AS curve and a decrease in the price level, so it is incorrect. Choice C would increase costs and decrease supply, resulting in a leftward shift in the AS curve and a higher price level and lower real GDP. Choice D would decrease consumer wealth and confidence, causing a decrease in aggregate demand and a leftward shift in the AD curve, resulting in a lower price level and real GDP.

Suppose the Economy Is Initially in Long-Run Equilibrium