Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the minimum wage, a major new discovery of oil, a large influx of immigrants, and new environmental regulations that raise the cost of electricity production. In the short run
A)the price level will rise and real GDP will fall.
B)the price level will fall and real GDP will rise.
C)the price level and real GDP will both stay the same.
D)All of the above are possible.

Question

Quizplus · Accepted Answer

Each of the events listed can have different effects on the economy, so each of the scenarios described in the answer choices are possible. The increase in minimum wage may raise production costs and lead to higher prices, causing inflation and a fall in real GDP. The discovery of oil may increase production and lead to a rise in real GDP, while the influx of immigrants can increase the labor force and promote economic growth. However, the new environmental regulations may raise production costs, leading to higher prices and a fall in real GDP. Therefore, all of the possible outcomes are plausible in the short run.

Suppose the Economy Is in Long-Run Equilibrium