Consider an economy in equilibrium, and assume no change in aggregate demand.An earthquake that destroys many factories across the country would result in a(n):
A)increase in the average price level and a decrease in real GDP.
B)increase in the average price level and no change in real GDP.
C)increase in the average price level and an increase in real GDP.
D)decrease in the average price level and an increase in real GDP.
E)decrease in the average price level and a decrease in real GDP.

Question

Quizplus · Accepted Answer

The earthquake destroys factories, which reduces the economy's productive capacity. This leads to a decrease in real GDP. The destruction of factories also reduces the supply of goods and services, which leads to an increase in the average price level.

Consider an Economy in Equilibrium, and Assume No Change in Aggregate