Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar increases. At the same time, people in the U.S. revise their expectations so that the expected price level falls. We would expect that 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

An increase in the value of the U.S. dollar (assuming no other changes occur) would lead to a decrease in net exports, which would cause aggregate demand to shift leftward. If people revise their expectations so that the expected price level falls, this would also shift aggregate demand leftward. As a result, the short-run equilibrium would feature a lower output level and a lower price level than the initial equilibrium.