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,then in the short-run we would expect
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 disposable income and stimulate consumption, leading to an increase in real GDP. The discovery of major new sources of oil would reduce production costs and increase the supply of goods and services, also leading to an increase in real GDP. However, the effect on the price level would depend on the relative magnitude of the two shocks. The tax cut would increase aggregate demand and could lead to inflationary pressures, while the discovery of new oil would increase aggregate supply and could lead to deflationary pressures. Therefore, the price level might rise, fall, or stay the same, but we would expect real GDP to rise in the short-run.

Suppose the Economy Is in Long-Run Equilibrium