Question

The following events have occurred at times in the history of the United​ States:

1. The world economy goes into an expansion.

2. U.S. businesses expect future profits to rise.

3. The government increases its expenditure on goods and services in a time of war or increased international tension.

Explain the separate effects of each event on U.S. real GDP and the price​ level, starting from a position of​ long-run equilibrium.

Starting from a position of​ long-run equilibrium, a world expansion​ ______, and an increase in expected future profits​ ______.

A.

increases real GDP and raises the price​ level;

increases real GDP and raises the price level

B.

increases real GDP and lowers the price​ level; increases real GDP and raises the price level

C.

increases real GDP and raises the price​ level; increases real GDP and lowers the price level

D.

decreases real GDP and raises the price​ level; decreases real GDP and raises the price level

Answer 1

"A"

All the events will lead to a rise in the real GDP and raise the price level in the market. This will shift the AD curve to the right and the new equilibrium will be at a higher price and higher output.