Suppose the economy is in its long-run equilibrium

Marketing Jan 09, 2021

Suppose the economy is in its long-run equilibrium. If there is an increase in investment, what happens in the short run?

a. Price level rises and output rises.

b. Price level falls and output rises.

c. Price level rises and output falls.

d. Price level falls and output falls.

e. Not enough information.

Expert Solution

The correct answer is a. Price level rises and output rises.

The rationale is an increase in the investment will result in an increase in the aggregate demand curve and the AD will shift to the right. Hence, the price level and output will increase as well.

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