Suppose the Economy Is Initially in Long-Run Equilibrium

question 71

Multiple Choice

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events, given that supply-side effects dominate demand-side effects?

• A) The price level will necessarily rise but the effect on output is indeterminate.
• B) Real GDP must necessarily fall but the effect on the price level is indeterminate.
• C) The price level and real GDP must rise.
• D) The price level must rise and real GDP must fall.

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Definitions:

Sales On Account

Transactions where goods are sold and delivered, but payment is delayed according to agreed terms instead of being made at the time of sale.

Cost Of Goods Sold

Direct costs associated with the assembly of products a company offers for sale, including labor and materials.

Operating Cycle

The duration it takes for a company to purchase inventory, sell products, and collect the cash from sales, measuring the efficiency of a business's cash flow.

Balance Sheet

A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a basis for computing rates of return and evaluating its capital structure.