Suppose the Closed Economy Is in Long-Run Equilibrium

question 44

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate-supply curve $120 billion to the right. At the same time, government purchases increase by $50 billion. If the MPC equals 0.8 and the crowding-out effect is $80 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:

Withdraw

The act of removing funds from an account, typically from a bank or investment.

Investment

Allocation of resources, usually money, into a vehicle expected to generate income or profit, such as stocks, bonds, or real estate.

Return on Investment

A measure of the financial gain or profitability of an investment relative to its cost, expressed as a percentage.

Accounts Payable Turnover Ratio

A financial metric that measures how quickly a business pays its suppliers; calculated as cost of goods sold divided by average accounts payable.