Suppose the Closed Economy Is in Long-Run Equilibrium

question 13

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 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 $160 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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Definitions:

Opportunity Cost

The cost of foregoing the next best alternative when making a decision or choice.

Consumption Time

The duration or period during which a consumer utilizes or enjoys a product or service.

Opportunity Cost of Time

The cost associated with forgoing the next best alternative when one chooses to spend time on a specific activity.

Consumption Time

The period during which consumers use or enjoy a good or service.