Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question. Refer to the information given.In the long run,an increase in the price level from 100 to 125 will:
A) increase real output from $500 to $560.
B) decrease real output from $500 to $440.
C) change the aggregate supply schedule from (a)to (c)and result in an equilibrium level of real output of $560.
D) change the aggregate supply schedule from (a)to (b)and result in an equilibrium level of real output of $500.

Question

Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question.  Refer to the information given.In the long run,an increase in the price level from 100 to 125 will:
A) increase real output from $500 to $560. 
B) decrease real output from $500 to $440. 
C) change the aggregate supply schedule from (a)to (c)and result in an equilibrium level of real output of $560. 
D) change the aggregate supply schedule from (a)to (b)and result in an equilibrium level of real output of $500.

Quizplus · Accepted Answer

An increase in the price level from 100 to 125 will shift the short-run aggregate supply schedule from (a) to (b). However, since prices and wages are flexible in both directions, the economy will adjust and move to a new equilibrium in the long run. In the long run, the economy will produce at the full employment level of real output, which is $500. Therefore, the increase in the price level will not affect the long-run equilibrium level of real output, which remains at $500.

Suppose the Full Employment Level of Real Output (Q)for a Hypothetical