In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph A, a decrease in the price level from P₁ to P₃ will lead to: A) A decrease in profits, an increase in real output, and a decrease in the unemployment rate B) A decrease in profits, a decrease in real output, and a decrease in the unemployment rate C) A decrease in profits, a decrease in real output, and an increase in the unemployment rate D) An increase in profits, an increase in real output, and a decrease in the unemployment rate

Question

Quizplus · Accepted Answer

In Graph A, a decrease in the price level from P₁ to P₃ will cause a decrease in profits for firms because the lower price level reduces their revenues. The decrease in profits will lead to a decrease in output and an increase in unemployment because firms will reduce production and lay off workers. Therefore, the correct answer is C: a decrease in profits, a decrease in real output, and an increase in the unemployment rate.

In the Graphs Below, QP Refers to the Economy's Potential

In the Graphs Below, Q_P Refers to the Economy's Potential