Chapter 4R, Problem 9MCQ

To determine

To determine what effect causes a higher profit due to increased price level in the short run.

Explanation of Solution

The wealth effect causes an overall increase in the consumer spending part of the aggregate demand. This is because of an increase in the purchasing power of the individuals in the economy. This leads to an increase in the price level as there is too much demand for less supply of goods. This increase in price leads to an increase in the profit of the firms in the short run.

The interest rate effect is not applicable as it does not affect the price level in the short run.

A sticky nominal wage is an assumption to determine the short-run equilibrium of output and employment.

Productivity gains are cost-effective for firms and decrease the average cost of production, leading to an increase in equilibrium output.

A stabilization policy is used to bring equilibrium in the short run.

The unit price of a product stays the same as worker wages aren't changing, and increased sales revenue translates into bigger profits.

Thus, option ‘a’ is the correct option.

Economics Concept Introduction

The increased price level in the short run, which can then increase the profit, is due to the wealth effect as an increase in wealth will increase consumer spending.