Question

1. The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $60 billions to the right. At the same time, government purchases increase by$30 billion. If the MPC equals 0.8 and the crowding-out effect of the government expenditures would reduce aggregate demand by $60 billion, we would expect that in the long-run,

A. both real GDP and the price level would be higher.

B. both real GDP and the price level would be lower.

C. real GDP would be higher but the price level would be lower.

D. real GDP would be higher but the price level would be the same.

2. High level of savings and investment lead to greater rates of economic growth. What can government do to encourage more savings and investment?

Answer 1

Answer:

1]

Correct answer: C] real GDP would be higher but the price level would be lower.

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $60 billions to the right. At the same time, government purchases increase by$30 billion. If the MPC equals 0.8 and the crowding-out effect of the government expenditures would reduce aggregate demand by $60 billion, we would expect that in the long-run,

Real GDP rises because LRAS rises. Prices fall because while LRAS rises AD does not rise proportionately. Note when LRAS rises SRAS will also shift downwards.

2] The government can encourage more savings and investment by reducing the interest rate. There must be policies enabled by the government to increase the sales of infrastructure and allow people to invest on such valuable assets. The employment opportunities must be increased for enhancing the living standards of people.