Suppose the Economy Is Initially in Long-Run Equilibrium

question 32

Multiple Choice

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and an increase in real GDP in the short run?

• A) A decrease in health insurance premiums paid by firms raises the cost of employing labor
• B) An increase in government transfer payments
• C) An increase in the cost of a key input such as oil
• D) A sharp fall in stock market prices

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Definitions:

Behavioural Finance

A field of study that combines psychological theories with conventional economics to explain why people make irrational financial decisions.

Securities Mispricing

A situation where a financial security is valued either above or below its true intrinsic value due to market inefficiencies, creating investment opportunities.

Beta

A metric for assessing the degree of systematic risk associated with a security or portfolio relative to the overall market.

Required Rate of Return

The minimal yearly percent yield needed to entice entities or individuals to channel funds into a specific investment or project.