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Why do changes in the price level increase short run economic output? Why do changes in...

Why do changes in the price level increase short run economic output? Why do changes in the price level decrease short run economic output? Why don’t changes in the price level have long run impacts on economic growth?

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Expert Solution

Short-run is a concept that states that within a certain period of time in the future and at least one input is fixed and others are variable. In short run, the nominal wage is rate is the input which is fixed, hence an increasing price indicates higher profits which justifies the expansion of output. If there is more spending it makes prices sticky. More spending makes prices more volatile, so inflation drops and turns into deflation. When the price level decreases the short-run curve shifts to the right and the GDP increases.

The long-run is the period when the general price level , wage rates, and expectations all adjust fully to the state of the economy. A long run is a period where all factors of production and cost are variable. Since there is this flexibility , there isn't a long-run trade-off between inflation and output.In the long run the output mainly depends on the resources and technology available rather than the price level.

Rahul Sunny answered 8 months ago
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