Question

In: Economics

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
Next > < Previous

Related Solutions

Suppose the economy is in long-run equilibrium.
Scenario 1 - Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Scenario 1 - Pessimism. Which curve shifts and in which direction? aggregate demand shifts right aggregate demand shifts left aggregate supply shifts right. aggregate supply shifts left.
Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will
  Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will  fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected.  rise and the price level might rise, fall, or stay the same. In the long run,...
Suppose that the economy is initally at a long run equilibrium and that prices are partially...
Suppose that the economy is initally at a long run equilibrium and that prices are partially sticky. Then the Fed increases the money supply. a. Assuming any inflation to be unexpected, describe any changes in GDP, unemployment, and inflation that are caused by the monetary expansion. Explain your conclusions using three diagrams: one for the IS-LM model and one for the AD-AS model. b. Assuming instead that any resulting inflation is expected, describe any changes in GDP, umemployment, and inflation...
Suppose the economy is in long-run equilibrium. In a short span of time, there is a...
Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp decline in the stock market, a tax cut, an increase in the money supply, and a decline in the value of the dollar. In the short run, what would we expect to happen?
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...
Suppose the U.S. economy was in both short-run and long-run equilibrium, until the economy experienced inflation....
Suppose the U.S. economy was in both short-run and long-run equilibrium, until the economy experienced inflation. a. Which policy would be consistent with the goals of monetary policy during this time? The Fed repos $25 billion worth of Treasury bonds to non-bank financial firms. The Fed reduces the discount rate from 7 percent to 5 percent. The Fed reduces the reserve ratio from 20 percent to 15 percent. The Fed sells securities worth $100 million to financial institutions.
Consider an economy that begins in long-run equilibrium. Suppose that there is a wave of pessimism...
Consider an economy that begins in long-run equilibrium. Suppose that there is a wave of pessimism that reduces investment demand at any given real interest rate. That is, suppose that the investment demand curve shifts down and to the left. Use the IS-LM diagram and the aggregate supply - aggregate demand diagram to show how this shift down of the investment demand curve affects the interest rate, income, investment, the price level, consumption, and the supply of real money balances...
11. Suppose that the economy is in a long run equilibrium. a.) Draw an Aggregate Supply...
11. Suppose that the economy is in a long run equilibrium. a.) Draw an Aggregate Supply - Aggregate Demand graph of the economy. Label the equilibrium point “E1 ". The Fed conducts an open market sale of bonds. On your graph, show the movement of the appropriate curves in the short-run AND long-run. Label the short run equilibrium point “E2” and label the long run equilibrium point “E3” b.) Draw an Aggregate Supply - Aggregate Demand graph of the economy....
Suppose the economy is in a long-run equilibrium. a. Draw a diagram to illustrate the state...
Suppose the economy is in a long-run equilibrium. a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short run aggregate supply, and long-run aggregate supply. b. Now suppose that a stock market crash causes aggregate demand to fall. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate? c. Use the sticky-wage theory of aggregate supply to explain what...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT