Which of these changes is observed in an economy when a recessionary gap is closed in the long run?
A) an increase in the inflation rate and a decrease in the unemployment rate
B) an increase in the level of output and a decrease in the price level
C) an increase in both the rate of output and the price level
D) a decrease in both the rate of output and the price level
E) a decrease in the inflation rate and an increase in the unemployment rate

Question

Quizplus · Accepted Answer

Closing a recessionary gap in the long run leads to an increase in the level of output and a decrease in the price level. This is because, in the long run, the economy adjusts its output level to its potential level, leading to decreased unemployment rates and increased production. As output rises, the price level begins to decrease due to increased competition in the economy. Therefore, option B is the correct answer.

Which of These Changes Is Observed in an Economy When