Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Question

Quizplus · Accepted Answer

A sharp increase in the minimum wage will increase the cost of labor for firms, and they may respond by reducing employment and/or increasing prices, leading to a decrease in real GDP. The increase in pessimism about future business conditions may cause firms to reduce investment and production, further reducing real GDP. The overall effect on price level is uncertain as it depends on the magnitude of the increase in minimum wage and the degree of pessimism in the economy.

Suppose the Economy Is in Long-Run Equilibrium