When the economy is at full employment and investment increases, in the long run the price level will ________ and, if potential GDP does not change, in the long run real GDP will ________.

Question

Quizplus · Accepted Answer

When the economy is at full employment, an increase in investment will initially boost demand, leading to higher prices. However, since the economy is already at its potential GDP, real GDP cannot increase in the long run; instead, the price level will rise.

When the Economy Is at Full Employment and Investment Increases