Starting from short-run equilibrium,the following occurs: individuals expect higher (future)incomes and wage rates rise.What is the effect on the price level and Real GDP in the short run?
A) The price level rises and Real GDP rises.
B) The price level falls and Real GDP falls.
C) The price level rises,but the effect on Real GDP cannot be determined.
D) Real GDP rises,but the effect on the price level cannot be determined.
E) Real GDP falls,but the effect on the price level cannot be determined.

Question

Quizplus · Accepted Answer

If individuals expect higher (future) incomes and wage rates rise, firms will have to pay more to hire workers and will increase the prices of the goods and services they produce. This will cause an increase in the overall price level, which is represented by a rightward shift of the aggregate supply curve. However, the effect on Real GDP cannot be determined because it depends on the relative magnitude of the increase in aggregate supply and demand. If the increase in aggregate demand is larger than the increase in aggregate supply, Real GDP will increase, but if the increase in aggregate supply is larger, Real GDP will fall.

Starting from Short-Run Equilibrium,the Following Occurs: Individuals Expect Higher (Future)incomes