Scenario 33-2
Imagine that in the current year the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
-Refer to Scenario 33-2. How is the new long-run equilibrium different from the original one?
A)The price level and real GDP are higher.
B)The price level and real GDP are lower.
C)The price level is higher and real GDP is the same.
D)The price level is the same and real GDP is higher.

Question

Quizplus · Accepted Answer

When stock prices rise significantly and remain high, it typically leads to increased wealth and potentially more investment. This can stimulate demand in the economy, leading to a short-term increase in both the price level and real GDP as the economy moves along the short-run aggregate supply curve. However, in the long run, the economy's output is determined by its supply-side factors (like labor, capital, and technology), not by demand-side factors. Therefore, in the long-run equilibrium, real GDP returns to its potential level, but the price level remains higher due to the initial demand increase.

Scenario 33-2 Imagine That in the Current Year the Economy Is in Is