Suppose the Economy Is in Long-Run Equilibrium

question 68

Multiple Choice

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen?

• A) In the short run, real GDP will rise, and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same, but real GDP will be unaffected.
• B) In the short run, real GDP will fall, and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same, but real GDP will be unaffected.
• C) In the short run, real GDP will rise, and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same, but real GDP will be lower.
• D) In the short run, real GDP will fall, and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same, but real GDP will be lower.

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Definitions:

Financial Leverage

The use of borrowed funds (debt) to amplify returns from an investment or project.

Fixed Asset Turnover Ratio

A performance metric that evaluates how efficiently a firm uses its fixed assets to generate sales.

Total Asset Turnover Ratio

A financial ratio that measures the efficiency of a company's use of its assets to generate sales revenue.

Inventory

Tangible property held for sale in the normal course of business or used in producing goods or services for sale.