Q1: For the next two questions, consider a decrease in economic investment. As a

Question

Q1: For the next two questions, consider a decrease in economic investment. As a result, in the new short run equilibrium, we expect to see P* ________ and Y* _______.

a) increase; decrease

b) increase; increase

c) decrease; decrease

d) None of the listed options is correct.

e) decrease; increase

Q2: Again, consider a decrease in economic investment. As a result, in the new long run equilibrium, we expect to see P* ________ and Y* _______.

a) fall; remain unchanged

b) rise; rise

c) None of the listed options is correct.

d) rise; remain unchanged

e) fall; fall

Explanation / Answer

1) A decrease in economic investment in the short run leads to decrease in output (Y) and increase in price (P)
Answer is A

2) A decrease in investment leads to shifting AD to the left but in the long run, AS will shift to the right to reach its original level of output, this cause price will decrease.
Ans is A price will fall and output remain unchanged

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