Question

For each of the following events, explain the short-run and long-run effects on output and the price level of the Egyptian economy, assuming policymakers take no action.

a. The stock market declines sharply, reducing consumers' wealth.

b. The government increases spending on national defense.

c. A technological improvement raises productivity.

d. A recession overseas causes foreigners to buy fewer Egyptian goods and services.

Answer 1

a) In the short run, the aggregate demand curve will shift to the left and the new equilibrium will be at a lower price and lower level of output in the market. In the long run, the SRAS will shift to the right and the new equyilibirum will be at a lower price level but higher output level.

b) This will shift the aggregate demand curve to the right, the new equilibrium will be at a higher price and higher level of output, in the long run, the SRAS will shift to the left, the new equilibrium in the market will be at a higher price but potential level of output.

c) This will shift the SRAS to the right in the short run, new equilibrium will be at a lower price and higher level of output, in the long run the LRAS and AD curve will shift to the right and the new equilibrium will be at a higher price and higher level of output.

d) In the short run, the aggregate demand curve will shift to the left and the new equilibrium will be at a lower price and lower level of output in the market. In the long run, the SRAS will shift to the right and the new equyilibirum will be at a lower price level but higher output level.