Suppose that the economy is at long-run equilibrium. If there is a sharp decline

Question

Suppose that the economy is at 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 fall 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.


C. the price level will rise, and real GDP might rise, fall, or stay the same


D. real GDP will rise and the price level might rise, fall, or stay the same.

Explanation / Answer

B. When the demand curve shifts to the left (decline in the stock market) and the supply curve shifts to the right (resource costs drop due to the increased labor force), the price level will definitely fall, but the GDP effect is uncertain unless you know to what degree each curve is shifting.

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