Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, what would we expect to happen?
A)The price level will rise, and real GDP will fall.
B)The price level will fall, and real GDP to rise.
C)The price level and real GDP will both stay the same.
D)The price level and real GDP will both fall.

Question

Quizplus · Accepted Answer

The large influx of skilled immigrants would increase the labor supply, which would initially decrease wages, leading to a decrease in prices. The major new discovery of oil and technological advance in electricity production would increase the supply of these goods, leading to a decrease in their prices as well. These factors combined would lead to a decrease in the overall price level and an increase in real GDP in the short run.

Suppose the Economy Is in Long-Run Equilibrium