Suppose the economy is in long-run equilibrium. In a short span of time, there is a decline in the money supply, a tax increase, a pessimistic revision of expectations about future business conditions, and a rise in the value of the dollar. In the short run, what would we expect to happen?
A) The price level and real GDP will both rise.
B) The price level and real GDP will both fall.
C) The price level and real GDP will both stay the same.
D) The price level will increase, and the real GDP will fall.

Question

Quizplus · Accepted Answer

A decline in the money supply, a tax increase, a pessimistic revision of expectations about future business conditions, and a rise in the value of the dollar would all lead to a decrease in aggregate demand. This would cause both the price level and real GDP to fall in the short run.

Suppose the Economy Is in Long-Run Equilibrium