Suppose the Closed Economy Is in Long-Run Equilibrium

question 92

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 0.8 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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Definitions:

Supply-Side Economics

An economic theory proposing that by lowering taxes and reducing regulations to stimulate production, economic growth is achievable.

Aggregate Supply

The overall volume of goods and services that companies in a nation expect to provide for purchase during a certain timeframe.

Government Policies

Guidelines, regulations, or laws implemented by a government to influence the economy or meet social goals.

Tax Cut

A Tax Cut is a reduction in the amount of taxes that individuals or corporations are required to pay to the government, often aimed at stimulating economic growth.