The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure, which will lower shipping costs for many businesses. What might we expect in the short run and the long run to happen to real GDP and the price level?
A) Real GDP will increase and the price level will fall, but in the long run, there will be no effect.
B) Real GDP will increase and the price level will fall, but in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
C) Real GDP will increase and the price level might rise, fall, or stay the same, and in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
D) Real GDP will increase and the price level might rise, fall, or stay the same, but in the long run, the price level will increase and real GDP might rise, fall or stay the same.

Question

Quizplus · Accepted Answer

In the short run, increased government spending boosts aggregate demand, raising real GDP. The price level may vary depending on the economy's position on the aggregate supply curve. In the long run, infrastructure improvements can enhance productivity, potentially increasing real GDP, while the price level's change depends on various factors like monetary policy and aggregate supply shifts.

The Economy Is in Long-Run Equilibrium When the Government Decides