Final answer:
In response to an increase in government purchases and a rise in oil prices in an economy at long-run equilibrium, the price level will likely increase, but the effect on real GDP is uncertain as it could rise, fall, or remain constant.option c is correct answer.
Step-by-step explanation:
The scenario where the economy is in long-run equilibrium and experiences an increase in government purchases alongside a large increase in the price of oil presents a few possible outcomes in the short-run. Examining aggregate demand (AD) and aggregate supply (AS) will help us understand the combined effect of these two economic events.
Firstly, an increase in government purchases will shift the AD curve to the right, indicating a higher level of spending which could raise both the price level and real GDP, under normal circumstances. However, the simultaneous large increase in the price of oil represents a negative supply shock, shifting the short-run aggregate supply (SRAS) curve to the left. This shift suggests that production costs have increased, leading to a decrease in quantity supplied at each price level, which typically raises the price level and lowers real GDP.
Given this dual shift, the effect on real GDP is ambiguous because while increased government spending tends to increase real GDP, the oil price hike tends to decrease it. However, the price level is likely to rise due to both the increase in AD and the decrease in SRAS. Therefore, the correct answer to the student's question is: c. the price level will rise, and real GDP might rise, fall, or stay the same.