Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects.
A)The AS curve shifts to the left; the price level rises and real GDP falls.
B)The AS curve shifts to the right; the price level falls and real GDP rises.
C)The AD curve shifts to the left; the price level falls and real GDP falls.
D)The AD curve shifts to the right; the price level rises and real GDP rises.
E)The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.

Question

Quizplus · Accepted Answer

Both headlines suggest positive economic developments: increased infrastructure investments can enhance productivity and efficiency, leading to a rightward shift in the Aggregate Supply (AS) curve. Similarly, new technology reducing transport costs can increase economic efficiency and productivity, also contributing to a rightward shift in the AS curve. Additionally, the infrastructure investments could increase overall demand (shifting the Aggregate Demand (AD) curve to the right) due to increased government spending and potentially higher consumer confidence. The combined effect of these shifts is an increase in real GDP, while the effect on the price level is uncertain because it depends on the relative magnitude of the shifts in the AD and AS curves.

Consider the Following Two Headlines Appearing in the Same Day