Question

g The long-run effect of an increase in household consumption is to raise a. both real output and the price level. b. real output and lower the price level. c. real output and leave the price level unchanged. d. the price level and leave real output unchanged.

Answer 1

Answer:

D). The price level and leave real output unchanged.

Explanation:

The long-run impact of an increase in household consumption is to elevate 'the price-level and leave real output unchanged.' The increased consumption would lead to a rise in demand which will correspond to an increase in out and decrease in unemployment.

As per the long-run self-adjustment mechanism, this shock in the economy will lead to inflation while the increase in Aggregate demand would correspond to an increase in prices and GDP. The inflation would increase the labor charges and therefore, the firms would produce less and it keeps falling until the full employment output is achieved. Thus, the long-run effect would be that GDP returns to its previous state(unchanged) while the prices are still higher. Hence, option D is the correct answer.