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Question 31 2 pts In a small open-economy, assume short-run equilibrium levels of output are below the natural rate of outputQuestion 32 2 pts Based on the below graph, if the economy starts from a short-term equilibrium at Point A, then the long-run

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Answer : 31) The answer is option D.

When short run equilibrium output is less than the natural rate of output level then the economy faces a situation of recessionary gap. Now to reach at the natural rate of output level in long-run the aggregate demand curve shift to rightward. As a result, the output level and price level both increase at long-run equilibrium. Therefore, option D is correct.

32) The answer is option D.

At point A the economy faces the situation of recessionary gap. Now to attain the long-run equilibrium the IS curve shifts to rightward and becomes IS2 from IS1. As a result, the long-run equilibrium occur at point C where the price level will be high. Because at point C the interest rate is high in compared to point A and there exists a positive relationship between price and interest rate. Therefore, option D is correct.

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