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.

Question

Quizplus · Accepted Answer

An increase in the minimum wage will increase costs for firms, leading to a decrease in output and employment in the short run. The increase in pessimism about future business conditions will also lead to a decrease in investment and consumption, further reducing output. In the long run, the decrease in output will lead to a decrease in the price level.

Suppose the Economy Is in Long-Run Equilibrium