Suppose the Economy Is Initially in Long-Run Equilibrium

question 129

Multiple Choice

Suppose the economy is initially in long-run equilibrium. Which statement best describes the state of the economy after an increase in aggregate demand?

• A) Prices and output are higher.
• B) Prices and output are lower.
• C) Prices are higher and output is the same.
• D) Prices are the same and output is lower.

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Definitions:

Zero-investment Portfolio

A portfolio that is constructed without requiring any initial capital, typically by taking long and short positions that offset each other.

Short and Long Positions

Short positions involve selling securities not owned with the hope of buying them back at a lower price, while long positions involve buying securities with the expectation that they will increase in value.

Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a theoretical framework used to determine the expected return on an investment, factoring in risk and the time value of money.

Security Market Line

The Security Market Line (SML) is a graphical representation in financial markets that depicts the expected rate of return of an investment as a function of its systematic, or market, risk, as measured by beta.