Suppose Canada's economy is in a long- run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, . In the long run, .
A)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
B)real GDP rises and the price level falls; real GDP and the price level return to their original levels
C)real GDP and the price level both fall; real GDP is below its original level with a lower price level
D)real GDP falls and the price level rises; real GDP is below its original level with a higher price level
E)real GDP and the price level both rise; real GDP is above its original level with a higher price level

Question

Quizplus · Accepted Answer

The decrease in the price of imported raw materials will reduce production costs for Canadian firms, leading to an increase in short-run aggregate supply (SRAS) and a corresponding increase in real GDP. However, since the decrease in imported raw materials prices is a temporary shock and not a permanent change in the economy's productive capacity, the long-run aggregate supply (LRAS) curve will remain at its original position, returning the economy to its potential output level in the long run. Therefore, in the long run, both real GDP and price level will return to their original levels.

Suppose Canada's Economy Is in a Long- Run Equilibrium with Real