Suppose the economy is in long-run equilibrium.In a short span of time,there is a sharp decline in the stock market,a tax cut,an increase in the money supply and a decline in the value of the dollar.In the short run,we would expect
A)the price level and real GDP both to rise.
B)the price level and real GDP both to fall.
C)the price level and real GDP both to stay the same.
D)All of the above are possible.

Question

Quizplus · Accepted Answer

In the short run, the decline in the stock market would lead to a fall in consumption spending, leading to a fall in real GDP. However, the tax cut and increase in the money supply would increase aggregate demand, leading to a rise in real GDP. The decline in the value of the dollar would also increase net exports, further increasing aggregate demand. Overall, the effects of these variables on price level and real GDP can be ambiguous and depend on the magnitude of their impacts. Therefore, all options are possible in the short run.

Suppose the Economy Is in Long-Run Equilibrium