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 fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP and the price level return to their original levels
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Question

Quizplus · Accepted Answer

A decrease in the Canadian price of all imported raw materials would result in a decrease in the costs of production for firms that use such materials. This would lead to an increase in short-run aggregate supply (SRAS) and a rightward shift of the SRAS curve. In the short run, this would result in a decrease in the price level and an increase in real GDP. However, in the long run, prices and wages will adjust, causing the SRAS to shift back to its original position, but with a higher price level. Thus, in the long run, real GDP returns to its original equilibrium level, but with a lower price level than before.

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