0-4. Suppose that the position of a nation’s long-run

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
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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