Question

14. Suppose the economy is in long-run equilibrium. If there is an expansion of government spending at the same time that a significant increase in immigration of skilled workers reduces production costs, then in the short-run we would expect
A. real GDP will fall and the price level might rise, fall, or stay the same.
B. real GDP will rise and the price level might rise, fall, or stay the same.
C. the price level will fall, and real GDP might rise, fall, or stay the same.
D. the price level will rise, and real GDP might rise, fall, or stay the same.
E. Either A or C will occur.
15. According to the AD/AS model, which of the following statements is (are) correct?
(x) Stagflation occurs if the economy experiences both an increase in prices and a reduction in output.
(y) Stagflation occurs if the aggregate supply curve shifts to the left because prices rise and output falls.
(z) An increase in the price level with a corresponding reduction in real GDP could be created by natural disasters such as floods, hurricanes and unusually dry weather
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

Question 14

Government spending is a component of the aggregate demand. So, expansion of government spending will lead to an increase in the aggregate demand. On the other hand, a significant increase in immigration of skilled workers that reduce production costs will induce the firms to produce more and, therefore, short-run aggregate supply will also increase.

When both aggregate demand and aggregate supply increases then real GDP also increases. However, impact on price level depends on the respective magnitude of increase in aggregate demand and aggregate supply.

So, in short run, we would expect real GDP will rise and the price level might rise, fall, or stay the same.

Hence, the correct answer is the option (B).

Question 15

A reduction in output leads to reduction in employment and increases unemployment.

The combination of rising price level and increasing unemployment is called stagflation.

It is generally caused by the leftward shift of the aggregate supply curve.

Natural disasters adversely impacts the production ability of the economy and thus result in a decrease in aggregate supply which in turn leads to a decrease in real GDP and an increase in the price level.

So, all the three statements are correct.

Hence, the correct answer is option (A).