Question

Consider a situation where the residents of a major U.S. trade partner see an increase in their income. Assuming the U.S. economy starts in equilibrium, order the following time periods by price level, from lowest to highest. Drag in correct order, starting with the first item in the sequence.

several years after an increase in the income of foreign buyers

immediately before an increase in the income of foreign buyers

a month after an increase in the income of foreign buyers

Answer 1

Answer

1) immediately before an increase in the income of foreign buyers

2) a month after an increase in the income of foreign buyers

3) several years after an increase in the income of foreign buyers

When aggregate demand increases, the equilibrium price level rises in the short-run, and then rises even more in the long-run after prices have the time to adjust.
While the price level adjusts even higher in the long-run, the output returns to its initial value.