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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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Answer #1

In the short run , the rise in the price denotes the increase in the profit earning prospects of the firm. In short run the wage rate is fixed , hence the cost will not rise as output rises. So in short run , the profit could be increased by increasing the output.

In the long run , the determinants of output are the level of employment and productivity. The changes in price does not affect the output in long run due to which LRAS curve is vertical in shape. Hence the price level will not determine the output in long run.

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