Question

In: Economics

12. Suppose the economy is in long-run equilibrium. If there is an increase in consumer spending...

12. Suppose the economy is in long-run equilibrium. If there is an increase in consumer spending due to a tax rebate at the same time that a natural disaster adversely affects the availability of production inputs within the country, then in the short-run we would expect
A. the price level will rise, and real GDP might rise, fall, or stay the same.
B. the price level will fall, and real GDP might rise, fall, or stay the same.
C. real GDP will fall and the price level might rise, fall, or stay the same.
D. real GDP will rise and the price level might rise, fall, or stay the same.
E. the price level might rise, fall or stay the same and real GDP might rise, fall, or stay the same.
13. Suppose the economy is in long-run equilibrium. If there is a significant consumption (sales) tax increase at the same time that major new sources of oil are discovered in the country, 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 might rise, fall or stay the same 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. the price level will fall, and real GDP might rise, fall, or stay the same.
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.

Solutions

Expert Solution

A. the price level will rise, and real GDP might rise, fall, or stay the same.

Effect on AD: INcrease in consumer spending and reduction in tax increases consumption part in AD.

AD = Consumption + Investment + Government Expenditure + Net Exports

Due to rise in consumption - AD curve will shift to the right

Effect on AS: Adverse affect on input of production due to natural disaster decreases the supply of inputs, which will leads to decrease in supply- AS Curve will shift to the left

The above diagram is shown when percentage change in AD is same as percentage change in AS. The GDP can be more or less depending on the percentage change in AD and AS

Change in AS > AD - Fall in GDP

Change in AS < AD - Rise in GDP

Change in AS = AD - Same GDP

E. the price level will fall, and real GDP might rise, fall, or stay the same.

Effect on AD: Increase in taxes decreases consumption part in AD.

AD = Consumption + Investment + Government Expenditure + Net Exports

Due to rise in consumption - AD curve will shift to the left

Effect on AS: Major new sources of oil are discovered in the country will increase the supply part- AS Curve will shift to the right

The shift in both curves will lead to fall in price and GDP may increase, decrease or stay same as per the change in AD and AS

Change in AS > AD - Rise in GDP

Change in AS < AD - Fall in GDP

Change in AS = AD - Same GDP

B. real GDP will rise and the price level might rise, fall, or stay the same.

Effect on AD: Expansion of government spending increases consumption part in AD.

AD = Consumption + Investment + Government Expenditure + Net Exports

Due to rise in consumption - AD curve will shift to the right

Effect on AS: Significant increase in immigration of skilled workers reduces production costs will increase the supply part- AS Curve will shift to the right

The above diagram is shown when percentage change in AD is same as percentage change in AS. The price can be more or less depending on the percentage change in AD and AS

The shift in both curves will lead to rise in price and price may increase, decrease or stay same as per the change in AD and AS

Change in AS > AD - Fall in GDP

Change in AS < AD - Rise in GDP

Change in AS = AD - Same GDP

Rahul Sunny answered 1 week ago

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