Suppose that you have the following information about the economy, where all figures are in millions of dollars:
Full employment output =$2,000
Consumption = $1,200 Investment = $400
Government spending = $500
Net exports =-$200
Because short-run output is ________ full-employment output, in the long run we would expect the price level to ________.
A) less than; rise
B) less than; fall
C) greater than; rise
D) greater than; fall
E) equal to; remain unchanged

Question

Suppose that you have the following information about the economy, where all figures are in millions of dollars: 
Full employment output =$2,000 
Consumption = $1,200 Investment = $400
Government spending = $500 
Net exports =-$200
Because short-run output is ________ full-employment output, in the long run we would expect the price level to ________.
A) less than; rise
B) less than; fall
C) greater than; rise
D) greater than; fall
E) equal to; remain unchanged

Quizplus · Accepted Answer

Since short-run output is less than full-employment output and the economy is operating below its potential, there will be excess supply in the market which will put downward pressure on the price level. In the long run, this excess supply will disappear as the economy moves towards full-employment output, and hence we would expect the price level to fall.

Suppose That You Have the Following Information About the Economy