The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run.
A) above
B) below
C) equal to
D) either above or below

Question

Quizplus · Accepted Answer

In the short run, if the equilibrium output is below the natural rate of output, firms are operating below their capacity and are likely to increase production. As a result, output increases and the price level decreases as more goods are supplied in the market. In the long run, all input prices adjust to the changes in output and the economy reaches its natural rate of output with lower prices. Therefore, the price level decreases and output increases, only if the short-run equilibrium is below the natural rate of output.

The Price Level Decreases and Output Increases in the Transition