Suppose the economy is at full employment and a booming stock market encourages consumption spending to rise dramatically. What would be the MOST likely long-run impact?

Question

Quizplus · Accepted Answer

In the short run, the increase in consumption spending would lead to an increase in demand for goods and services, causing a temporary increase in real GDP. However, in the long run, this increase in demand could lead to an increase in prices, known as inflation. This would eventually lead to a decrease in purchasing power and a decrease in consumption. Real GDP would then fall back to its long-run equilibrium level. Thus, real GDP would first rise and then fall back to long-run equilibrium.

Suppose the Economy Is at Full Employment and a Booming