As a contractionary gap is closed in the long run,
A)the inflation rate increases and unemployment decreases
B)output increases and the price level decreases
C)both output and the price level increase
D)both output and the price level decrease
E)the inflation rate decreases and unemployment increases

Question

Quizplus · Accepted Answer

In the long run, a contractionary gap is closed through adjustments in prices and wages, leading to an increase in output, and a decrease in the price level. This is known as the self-correction mechanism of the economy. The opposite would occur in the case of an expansionary gap, where an increase in output would lead to higher prices. Thus, option B (output increases, and the price level decreases) is the correct choice.

As a Contractionary Gap Is Closed in the Long Run