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:

Real Defense

A defense in law that allows a promissory note or negotiable instrument to be invalidated based on factors like fraud or forgery.

Holder in Due Course

A legal term describing someone who has acquired a negotiable instrument (like a check) in good faith and without knowledge of any defects.

Gambling

The act of wagering money or valuables on the outcome of a game or event with an uncertain result, with the primary intent of winning additional money or goods.

Real Defense

A legal defense that is valid against all the world, including bona fide purchasers or holders in due course.