An increase in the price level ___.

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BlackTom AI · Accepted Answer

Consider the prompt: an increase in the price level and how it affects the economy within a standard macroeconomic framework.
Option 1: 'decreases the equilibrium level of real GDP' – In many macro models, especially the short-run aggregate supply and aggregate demand framework, a higher price level reduces the real quantity of output supplied or demanded, depending on the model configuration. Since this option states that real GDP falls when the price level rises, it aligns with the typical short-run effect in the presence of downward-sloping aggregate demand: higher prices reduce real balances and thus consumption and investment, pulling real GDP down toward a new equilibrium.
Option 2: 'increases production and employment' – A rise in the price level generally discourages real spending power and reduces real activity, not increases it. So this claim contradicts the common outcome where higher prices dampen real GDP and employment in the short run.
Option 3: 'decreases government spending' – The price level itself does not inherently cause a decrease in government spending. Fiscal policy changes (cuts or increases in spending) are separate from changes in the price level, so this statement misattributes the cause-and-effect relationship.
Option 4: 'increases investment' – Higher price levels typically raise borrowing costs or distort incentives, which tends to reduce, not increase, investment in the short run. Thus this option inaccurately describes the typical response to a price level rise.
Overall, the reasoning across options highlights that higher price levels are associated with weaker real GDP demand dynamics and do not automatically boost spending, government outlays, or investment. The claim that real GDP decreases is the only option that coherently matches standard short-run macroeconomic intuition about price level increases implying lower real GDP.

ECON 2002.01 AU2025 (21333) Midterm Exam 3 - Requires Respondus LockDown Browser

An increase in the price level ___.

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ECON 2002.01 AU2025 (21333) Midterm Exam 3 - Requires Respondus LockDown Browser

An increase in the price level ___.

View Explanation

Log in for full answers

Similar Questions

The graph below illustrates the effects of monetary policy that shifts the AD curve right. This will result in a __________ in unemployment and a ____________ in the price level.

Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

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At output level Yk,

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Assume this economy is initially producing an output of Y1. As the economy moves from Y1 to Y2 ___.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

The graph below illustrates the effects of monetary policy that shifts the AD curve right. This will result in a in unemployment and a __ in the price level.

Figure 33-6 Refer to Figure 33-6. Suppose the economy starts at A. If changes occur that move the economy to a new short-run equilibrium of P1 and Y1 , then it must be the case that

Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to