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
A)the price level and real GDP will both rise.
B)the price level and real GDP will both fall.
C)neither the price leave nor real GDP will change.
D)All of the above are possible.

Question

Quizplus · Accepted Answer

All of the above are possible because the effects of each of these events on the economy in the short run are ambiguous and depend on a variety of factors including the size and duration of the events, as well as how individuals, firms, and government react to them. For example, the decline in the stock market could lead to a decrease in consumer and business confidence, causing a decrease in aggregate demand and a fall in real GDP and the price level. However, the tax cut and increase in the money supply could stimulate aggregate demand, causing an increase in real GDP and the price level. The decline in the value of the dollar could have mixed effects, depending on whether the economy is open or closed and whether exports or imports are more affected. Therefore, it is difficult to predict the net effect of these events on the economy without further information.

Suppose the Economy Is in Long-Run Equilibrium