Scenario 14-1
The economy is in long-run equilibrium. Suddenly, due to improved international relations, a boom experienced by a major trading partner, and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to the Scenario 14-1. In the short run, which statement describes the changes that take place in the economy?
A) Both the price level and real GDP rise.
B) Both the price level and real GDP fall.
C) The price level rises and real GDP falls.
D) The price level falls and real GDP rises.

Question

Quizplus · Accepted Answer

The increased optimism leads to increased consumption and investment spending, which increases aggregate demand. In the short run, this leads to both an increase in the price level (due to higher demand for goods and services) and an increase in real GDP (due to increased production to meet demand).

Scenario 14-1 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Improved