After an increase in autonomous spending, in the long run, changes in the price level
A) will reduce the effect of the multiplier.
B) will make the AE curve flatter.
C) will make the AE curve steeper.
D) will not affect the multiplier.

Question

Quizplus · Accepted Answer

An increase in autonomous spending creates upward pressure on the price level, which reduces the real value of money and eventually leads to an increase in production costs (e.g. wages, raw materials). As production costs rise, firms increase their prices, which further raises the price level. This process is called cost-push inflation. However, price level changes reduce the real value of the multiplier, as each successive round of spending leads to smaller and smaller increases in output due to higher production costs. Therefore, the effect of the multiplier is reduced in the long run.

After an Increase in Autonomous Spending, in the Long Run