If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

In the transition to the long run, if the short-run equilibrium occurs at a level of output above the natural rate, prices will increase due to higher demand and output will decrease as the economy adjusts back towards the natural rate of output.

If a Short-Run Equilibrium Occurs at a Level of Output