Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,

a. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

b. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected.

c. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

d. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same.

Question

Nora Duran

Business

13 January, 20:19

Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,

a. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

b. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected.

c. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

d. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same.

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Answers (2)

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Eddie Oconnor · Answer 1

Answer: C. the price level will fall, and real GDP might rise, fall or stay the same. In the long run, real GDP will rise and the price level will fall.

Explanation: When the price level falls, consumers are wealthier, a condition that induces more consumer spending.

As the supply of loans increases, the cost of loans--that is, the interest rate--decreases. Thus, a low price level induces consumers to save, which in turn drives down the interest rate.

The intuition behind the real wealth effect is that when the price level decreases, it takes less money to buy goods and services. The money you have is now worth more and you feel wealthier. So, in response to a decrease in the price level, real GDP will increase.

Rodney Leach · Answer 2

C) the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

Explanation:

A sharp decline in government purchases will decrease aggregate demand, causing a decrease in the inflation rate and a possible slowdown of the economy.

On the other hand, the large inflow of skilled workers will increase the supply of labor but at the same time will increase aggregate demand.

In the short run the effect of both events will make the price level to fall, and the real GDP might change or not, depending on which factors weighs more on the economy. If the negative effect of the decrease in government spending is larger than the positive effect of the increase in aggregate supply. But t can also be the opposite, and the real GDP might grow, so in the short run the effect cannot be measured only with this information.

Only the long run, the effects will be positive since both real GDP should increase, and inflation should remain low