Suppose the Economy Is Initially in Long-Run Equilibrium

question 59

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?

• 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:

Reasonable Grounds

Reasonable grounds refers to a set of facts or circumstances that would lead a person of ordinary caution and prudence to believe or suspect that a certain fact or event has occurred or is the case.

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Stands for the Uniform Commercial Code, a standardized collection of laws and regulations that govern commercial transactions in the United States.

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The act of formally withdrawing acceptance of an offer in a contract, typically due to the discovery of a defect or misrepresentation that significantly affects the contract's value.

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The failure of a product, document, or service to meet specified or implied standards or expectations.