We observe an increase in the price level and a decrease in real GDP.Which of the following is a possible explanation?
A)an increase in the quantity of money
B)an increase in expected future profits
C)an increase in factor prices
D)an increase in expected future income
E)an increase in the quantity of capital

Question

Quizplus · Accepted Answer

An increase in factor prices (such as wages and raw materials) can lead to higher production costs for businesses. These higher costs are often passed on to consumers in the form of higher prices, leading to an increase in the price level. At the same time, the higher production costs can reduce the quantity of goods and services that businesses are willing to produce at any given price level, leading to a decrease in real GDP. This scenario aligns with the observed economic conditions of increasing price levels and decreasing real GDP.

We Observe an Increase in the Price Level and a Decrease