Question

Explain how, if at all, each of the following events would affect equilibrium real GDP and the long run equilibrium price level.

a. A reduction in the quantity of money in circulation

b. An income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services

c. A technological improvement

d. A decrease in the value of the home currency in terms of the currencies of other nations

Short answer

a. The equilibrium real GDP remains unchanged.

b. Thus, equilibrium real GDP remains unchanged

c.Thus, equilibrium real GDP increases.

d. Thus, the equilibrium real GDP remains unchanged.

Step-by-step solution

Unchanged (a)

a. Adiscount within the quantity of cash in circulation causes a leftward shiftwithin the aggregate demand along the long-run aggregate supply curve. This results into a fall in equilibrium price. So, the equilibrium real GDP remains unchanged.

Unchanged (b)

b. Antax rebate fromthe govt. to householdsresults in a rightward shiftwithin the aggregate demand curve along the long-run supply curve. As aresults of this, the equilibrium price rises, and thus, equilibrium real GDP remains unchanged.

Rightward (c)

c. A technological improvement causes a rightward shift within the long-run aggregate supply curve along the combination demand curve. This ends up in fall of equilibrium price. Thus, equilibrium real GDP increases.

Unchanged (d)

d. A decrease within the value of the house currency in terms of the currencies of other nations ends up in a rightward shift within the aggregate demand curve along the long-run aggregate supply curve. This results into the increase of equilibrium price, and thus, the equilibrium real GDP remains unchanged.