In: Economics
What is the relationship between the price level and the level of output in the long run?
In the short run, what happens to the level of output when the government increases its spending?
What is the long-run effect of increasing output beyond the full-employment level?
1. Relationship between the price level and the level of output in the long run
In the long run, aggregate supply curve is vertical such that any change in price level has no effect on the output level since that output level reflects the full employment output level . So, there is no relationship between the price and the output level in the long-run.
Hence, the correct answer is the option C.
2. In the short run, what happens to the level of output when the government increases its spending?
In the short run, a rise in government spending increases the aggregate demand as it is one of the components of aggregate demand. This shifts the aggregate demand curve to the right (outward) which results in a rise equilibrium output level.
Hence, the correct answer is the option B.
3. Long-run effect of increasing output beyond the full-employment level
If the actual output increases more than the full-employment level in the long run, prices and wages rise, resulting in a decline in the actual output level in order to bring the economy back to the full-employment output level.
Hence, the correct answer is the option A.