Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:
A) both output and the price level will increase.
B) output will decrease, but the price level will increase.
C) output will increase, but the price level will decrease.
D) both output and the price level will decrease.

Question

Quizplus · Accepted Answer

Starting from a short-run equilibrium greater than the natural rate of output, the economy experiences inflationary pressures that lead to an increase in the price level as it returns to the long-run equilibrium. Output decreases as the economy adjusts back to its potential or natural rate of output, while the price level increases due to these inflationary pressures.

Starting from a Short-Run Equilibrium Greater Than the Natural Rate