Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, what would we expect will happen 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.

Question

Quizplus · Accepted Answer

A tax cut would increase aggregate demand and shift the AD curve to the right, leading to an increase in both real GDP and the price level in the short run. The discovery of new sources of oil would reduce the cost of production, leading to a decrease in the price level. However, it is unclear whether this decrease would be enough to offset the increase in aggregate demand from the tax cut, so the price level may rise, fall, or stay the same in the short run.

Suppose the Economy Is in Long-Run Equilibrium