As an expansionary gap is closed in the long run by firms' actions,
A)output decreases and the price level increases
B)inflation decreases and unemployment rises
C)both output and the price level increase
D)both output and the price level decrease
E)inflation rises and unemployment decreases

Question

Quizplus · Accepted Answer

In the long run, as firms respond to an expansionary gap, they reduce output to return to potential GDP, leading to a decrease in output. However, the price level increases due to higher demand and costs.

As an Expansionary Gap Is Closed in the Long Run