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Suppose that during a given year, the quantity of U.S. real GDP that can be produced in the long run rises from 17.9trillion to18.0 trillion, measured in base year dollars. During the year, no change occurs in the various factors that influence aggregate demand. What will happen to the U.S. long-run equilibrium price level during this particular year?

Short Answer

Expert verified

The U.S. future equilibrium indicator will decline during this particular yearthanks to the presence of stable aggregate demand.

Step by step solution

01

Given Information

Aggregate demand givesthe assorted quantities of all final goods and services which are demanded at various corresponding price levels, keeping all other things constant. Aggregate supply showsthe varied quantities of all goods and services which the firms areable to trade at a specifiedperiod of time.

02

Explanation

In this question, the real GDP has been increased from 17.9trillion to 18 trillion which suggests the LRAS curve has been increased vertically to 18 trillion and aggregate demand will remain the identical because it is on condition that no change occurswithin the various factors that influence aggregate demand.
The following diagram shows real GDP and price level:

Equilibrium occurs at some extent where the combination demand and aggregate supply curves intersect. Similarly, equilibrium indicator occurs at some extent where the mixture demand curve crosses the long term Aggregate supply curves (LRAS).

03

Stable

Whenthe combination demandisn't changing but real GDP increases,that the growing economy is experiencing deflation or sometimes called secular deflationwhich implies endless decline in prices resulting fromeconomic process within the presence of constant aggregate demand.

Hence, the U.S.future equilibriumindicator will decline during this particular yearthanks to the presence of stable aggregate demand.

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Most popular questions from this chapter

Assume that the economy is in long-run equilibrium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a rise in the price level induced by an increase in aggregate demand. what happens to real GDP?

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

For each question, sั‰pose that the exonorm begins at the long-run equilibrium point Ain the diagram below. Identify which of the other points on the diagram-points B,C,D, or E-could represent a new long-run equilibrium after the described events take place and move the economy away from point A.

a. Significant productivity improvements occur, and the quantity of money in circulation increases.

b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.

c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $18trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115 . What is the full-employment level of nominal GDP?

Suppose that the position of a nation's long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this event?

a. A rise in the value of the domestic currency relative to other world currencies

b. An increase in the quantity of money in circulation

c. An increase in the labor force participation rate

d. A decrease in taxes

e. A rise in real incomes of countries that are key trading partners of this nation

f. Increased long-run economic growth

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