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)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.
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 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.
D)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.

Question

Quizplus · Accepted Answer

A decline in government purchases will lead to a decrease in aggregate demand in the short-run, causing both real GDP and the price level to decrease. However, an increase in immigration of skilled workers will increase the economy's potential output in the long-run, leading to an increase in real GDP in the long-run. The decrease in aggregate demand in the short-run combined with the increase in potential output in the long-run will lead to a fall in the price level in the long-run, while real GDP rises. Therefore, the best choice is D.

Suppose the Economy Is in Long-Run Equilibrium