Question

PLEASE explain why each answer of the following questions is correct, I need to understand it .

1)Economy is at its long run equilibrium. Assuming all else equal, stock market collapses and consumer sentiment level deteriorates. Which of the following is incorrect?

A. In short run, output level decreases and price level decreases.

B. In long run, output level is back to its long run output level.

C. In short run, short run aggregate supply decrease.

D. In long run, economy self corrects as short run aggregate supply increases.

2. Economy is at its long run equilibrium.

Thanks to a favorable business environment, stock market is booming so is housing market. What would be the price level and output in the long run? (assuming all else equal)

A. Price level is higher than its long run level, and output level is higher than its long run level.

B. Price level is higher than its long run level, but output is at its long run output.

C. Price level is at its initial level, but output level is lower than its long run output.

D. Price level is lower than its initial level, and output is higher than its long run level.

3. Economy is at its long run equilibrium. Assuming all else equal, thanks to a strong Chinese demand of U.S. goods, exports in U.S. economy has increased. Which of the following is correct?

A. SRAS increases.

B. LRAS increases.

C. In short run, aggregate price level decrease.

D. In long run, aggregate output level is at its long run output.

4. Economy is at its long run equilibrium. Suppose stock market crashes, housing price goes down, business confidence decreases and foreign market GDP number goes down. (Assuming all else equal) Which of the following is correct?

A. Short run aggregate supply decreases in short run.

B. In long run, long run aggregate supply decrease.

C. In short run, aggregate price level increases.

D. In long run, aggregate price level is lower than its initial level.

5.Economy was at its long run equilibrium. Assuming all else equal, there was an increase in exports. Which of the following is incorrect?

A. Classical economists would say that the price level will be higher than before, and output level will be at its potential output.

B. Keynesian economists would say that both the price level and output will be higher than before.

C. Keynesian economists would suggests stabilization policy to close a positive output gap.

D. Classical economists would suggests an increase in tax to close a positive output gap.

Please explain the reason for each answer, I will give great review!

Answer 1

1.
Correct Answer:
C

When the stock market collapses and consumer sentiments decreases, then aggregate demand shifts to the left. It causes the output to decrease and price to decrease as well. After this, the short run aggregate supply, will increase and shift to the right. It will push the real output to be at the level of potential output, but at the lower price.
So, in short run, aggregate supply curve increases.

2.
Correct Answer:
B

In the long run, only nominal variable such as price changes, but real GDP or output does not change. When the stock market is booming, then AD curve shifts to the right, increasing output and price. It causes the demand pull inflation and SRAS curve shifts to the right. It makes economy back to the potential output level, but at the higher price.

3.
Correct Answer:
D

Due to increase in the export, the AD will shift to the right, but it will increase the price. As a result the SRAS will shift back to the left. It will bring back the economy at long run output level, but at higher prices.

4.
Correct Answer:
D

In the long run, output level reaches back to the potential output level. But, it happens at the reduced price level. Initially, AD curve shifts to the left and price and output decreases. It also reduces the wages. As a result, SRAS shift to the right and achieves potential output, but at the lower price.

Pl. repost the other questions for their proper answers!