Suppose the economy is in long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, what would we expect to happen?
A) In the short run, real GDP will rise, and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise, and the price level might rise, fall, or stay the same.
B) In the short run, the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected.
C) In the short run, the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise, and the price level will fall.
D) In the short run, the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise, and the price level will fall.

Question

Quizplus · Accepted Answer

A decline in the stock market may lead to a decrease in investment, which would cause a decrease in aggregate demand (AD) in the short run. However, the increase in skilled immigration may increase the economy's long-term growth potential by increasing the labor force and technological advance. This would result in a rightward shift in the long-run aggregate supply (LRAS) curve. In the short run, the decrease in AD and increase in LRAS would cause a temporary decrease in the price level and possibly a decrease in real GDP. In the long run, the increase in LRAS would shift AD to equilibrium at the potential GDP level with a lower price level. Therefore, in the long run, real GDP would rise and the price level would fall.

Suppose the Economy Is in Long-Run Equilibrium