If labor costs rise at the same time that the federal government decreases its purchases,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) aggregate output will fall, but the price level may either increase or decrease.

Question

Quizplus · Accepted Answer

When labor costs rise, it increases the cost of production, which leads to a decrease in aggregate supply (output). If the federal government decreases its purchases, it reduces aggregate demand. The combination of a decrease in aggregate demand and a decrease in aggregate supply results in a fall in aggregate output. The effect on the price level is ambiguous and depends on the relative magnitudes of the shifts in demand and supply. Therefore, aggregate output will fall, but the price level may either increase or decrease.

If Labor Costs Rise at the Same Time That the Federal