Suppose an expansionary gap is closed in the long run by firms' actions.How will output level and price level be affected?
A) Output will decrease and price level will increase.
B) Output will increase and price level will decrease.
C) Output will increase and price level will increase.
D) Output will decrease and price level will decrease.

Question

Suppose an expansionary gap is closed in the long run by firms' actions.How will output level and price level be affected?  
A) Output will decrease and price level will increase. 
B) Output will increase and price level will decrease. 
C) Output will increase and price level will increase. 
D) Output will decrease and price level will decrease.

Quizplus · Accepted Answer

In the long run, to close an expansionary gap, firms adjust by reducing output to its natural level, leading to a decrease in output. This adjustment often comes with increased prices due to higher demand and costs, hence the price level increases.

Suppose an Expansionary Gap Is Closed in the Long Run