Question

 

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will 

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. 

rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower. 

rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected.

Answer 1

Option C - Fall and the price level might fall, rise, or stay the same. In the long-run price level might rise, fall, or stay the same but real GDP will be lower.

• We have given the economy in long-run equilibrium.
• given that if there is a sharp increase in the minimum wage and tax rise.
• In short-run and long-run, the price level might rise, fall or remain the same.
• But since there is an increase in minimum wage and tax rates, the real GDP in the short-run will be lower

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