Suppose the Closed Economy Is in Long-Run Equilibrium

question 26

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate-supply curve $80 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $70 billion, what would we expect to happen in the long-run to real GDP and the price level?

• 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.

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