Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, there is a sharp decline in the stock market. What would we expect to happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Question

Quizplus · Accepted Answer

Significant restrictions on the production of electricity will lead to a decrease in aggregate supply, causing a decrease in real GDP. The sharp decline in the stock market will lead to a decrease in investment, further contributing to the decrease in real GDP. The direction of the price level is not clear as it will depend on the magnitude of the decrease in aggregate supply and aggregate demand.

Suppose the Economy Is in Long-Run Equilibrium