Suppose the economy is in long-run equilibrium.Concerns about pollution cause the government to significantly restrict the production of electricity.At the same time,the value of the dollar falls.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

The significant restriction on electricity production will reduce the supply of goods and services, which will decrease real GDP. However, the fall in the value of the dollar will increase net exports, which will increase aggregate demand. The overall effect will be a reduction in the quantity of goods and services supplied and an increase in the quantity of goods and services demanded. This will lead to an increase in the price level and a potential increase, decrease, or no change in real GDP. Therefore, we would expect the price level to rise, and real GDP might rise, fall, or stay the same in the short run.

Suppose the Economy Is in Long-Run Equilibrium