Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the...

Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run
a. real GDP will rise and the price level might rise, fall, or stay the same.
b. real GDP will fall and the price level might rise, fall, or stay the same.
c. the price level will rise, and real GDP might rise, fall, or stay the same.
d. the price level will fall, and real GDP might rise, fall, or stay the same.

Answer is D, but why? What concepts need to be understood to be able to arrive at this answer?

Solutions

Expert Solution

The correct answer is (d) the price level will fall, and real GDP might rise, fall, or stay the same

If there is a sharp decline in the stock market then Aggregate demand(AD) will shift to the left and If a significant increase in immigration of skilled workers then this means that Short run aggregate supply(SRAS) curve will shift to the right.Hence SRAS curve will shift to the right and hence Price will surely decrease.Now If rightward shift of supply curve is greater than leftward shift of aggregate demand curve(AD) then real GDP will increase and If rightward shift of supply curve is lesser than leftward shift of aggregate demand curve(AD) then real GDP will decrease and If rightward shift of supply curve is equal to leftward shift of aggregate demand curve(AD) then real GDP will remain same.

Hence, the correct answer is (d) the price level will fall, and real GDP might rise, fall, or stay the same

Rahul Sunny answered 1 year ago

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