In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x₁ but then there is an increase in the price level from P₁ to P₂. This change will lead to: A) A movement from x₁ to x₂ in the short run, and the unemployment rate decreases, followed by a shift from x₂ to y₁ as nominal wages rise in the long run B) A movement from x₁ to x₃ in the short run, and the unemployment rate decreases, followed by a shift from x₃ to x₁ as output rises in the long run C) A movement from x₁ to y₁ in the short run, and back to x₁ in the long run D) No change in the short run, but a shift from x₁ to y₁ in the long run

Question

Quizplus · Accepted Answer

An increase in the price level will decrease the quantity of output demanded and increase the quantity of output supplied, leading to a movement from x₁ to x₂ in the short run. This will lead to a decrease in the unemployment rate. However, as nominal wages rise in the long run, the short-run aggregate supply curve will shift leftward, leading to a shift from x₂ to y₁ in the long run.

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

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