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, then in the short run,
A)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)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)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)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 sharp decline in the stock market will decrease aggregate demand and shift the AD curve leftward, causing a short-run equilibrium with lower output and prices. An increase in skilled immigration, on the other hand, will increase aggregate supply, shifting the AS curve rightward. The combination of these two shocks will lead to a short-run equilibrium with lower prices and an indeterminate level of output, which depends on the relative magnitudes of demand and supply shocks.

In the long run, however, the increase in skilled immigration will increase the economy's potential output and shift the LRAS curve rightward. This will enable the economy to produce at a higher level of output while maintaining a lower price level, resulting in a long-run equilibrium with higher output and lower prices compared to the initial equilibrium. Therefore, choice D is the best answer.

Suppose the Economy Is in Long-Run Equilibrium