0-4. Suppose that the position of a nation’s long-run
| 10-4. Suppose that the position of a nation’s long-run | ||||||||
| aggregate supply curve has not changed, but its | ||||||||
| long-run equilibrium price level has increased. | ||||||||
| Which of the following factors might account for | ||||||||
| this event? (See page 219.) | ||||||||
| price can rise when AD rises or short run AS falls. | ||||||||
| a. A rise in the value of the domestic currency | ||||||||
| relative to other world currencies | ||||||||
| the currency has appreciated. | ||||||||
| this implies lower net exports. Asa result GDp will decline spo that price declines. | ||||||||
| this factor cant be responsible for higher prices. | ||||||||
| b. An increase in the quantity of money in | ||||||||
| circulation | ||||||||
| this implies more money in the hands of people. Whether this translates into higher AD in short run in uncertain. This depends on economic conditions. | ||||||||
| However in the long run, classical economists predict that a rise in money supply translates into equal rise in price level. | ||||||||
| c. An increase in the labor force participation rate | ||||||||
| this can affect AD by increasing consumption levels. The incomes generated/ earned by new entrants to labor force will lead to higher consumption. This increases AD, which raises prices. | ||||||||
| this factor can increase prices. | ||||||||
| d. A decrease in taxes | ||||||||
| this will increase consumption , which isa part of AD. | ||||||||
| the Ad will rise to increase prices. | ||||||||
| this factor can increase prices. | ||||||||
| e. A rise in real incomes of countries that are key | ||||||||
| trading partners of this nation | ||||||||
| this implies more demand for exports of this nation, which isa part of aggregate demand. | ||||||||
| a rise in ex[orts implies rise in Ad, which increases prices. | ||||||||
| f. Increased long-run economic growth | ||||||||
| this will affect AS by increasing it. So pice will fall. therefore this event cant increase prices. | ||||||||
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