In the short-run, an increase in the price of raw materials will ___________the price level and___________ real GDP.
A) lower; increase
B) lower; decrease
C) raise; decrease
D) raise; increase

Question

Quizplus · Accepted Answer

An increase in the price of raw materials will increase the cost of production for firms, leading to a decrease in the quantity of goods and services supplied in the short run. This will lower real GDP, as there will be a reduction in output. However, due to the increase in production costs, firms will raise prices to maintain their profit margins, which will lead to a rise in the price level. Therefore, the correct choice is C: raise; decrease.

In the Short-Run, an Increase in the Price of Raw