Question

Which of the following would cause prices to rise and real GDP to fall in the short run?

Question options:

	an increase in the expected price level
	an increase in the capital stock
	an increase in the quantity of labor available

Answer 1

The correct answer is (a) an increase in the expected price level

Increase in quantity of labor will result in decrease in wage rate and hence will decrease the cost of production and hence Aggregate supply curve will shift to the right and AD remains same. Hence, Rightward shift in AS curve will result in increase in Output and decrease in Price and hence Option (c) is incorrect.

An increase in the capital stock will result in rightward shift of production function and hence, AS again will shift to the right and hence output will increase and price will decrease and hence Option (b) is incorrect.

If expected price level increases then Suppliers will supply less amount because they are expected to sell there output at a higher price in the future and hence because of this AS in the short run will shift to the Left and will result in Increase in Price and decrease in Quantity.

hence, the correct answer is (a) an increase in the expected price level