Question

Suppose the value of the U.S. dollar increases relative to foreign currencies. What would be the short-run effect?

Group of answer choices

A. An increase in Real GDP, an increase in the GDP Deflator

B. An increase in Real GDP, a decrease in the GDP Deflator

C. A decrease in Real GDP, an increase in the GDP Deflator

D. A decrease in Real GDP, a decrease in the GDP Deflator

What is the long-run effect of a negative supply shock?

Group of answer choices

A. GDP Deflator decreases, RGDP decreases

B. GDP Deflator increases, RGDP decreases

C. GDP Deflator increases, no change in RGDP

D. No change GDP Deflator, no change in RGDP

Answer 1

1)The value of US dollar increases relative to foreign currencies. This means that the foreign goods and services have become relatively cheaper for the US Residents. This leads to an increase in US imports. Moreover the US goods and services have become more expensive for the foreign residents because they have to pay in dollar and dollar has increased in value. This leads to a decrease in US Exports. An increase in in US imports and decrease in US exports leads to to a decrease in the net Exports of US. Decrease in net exports leads to decrease in aggregate demand of US. Decrease in aggregate demand Decreases the real GDP and decreases the GDP deflator as well in the short run.

Hence, the short run effect would be a decrease in real GDP, a decrease in the GDP deflator.

Therefore, option D is correct

2) a negative supply shock decreases aggregate supply in the short run. This leads to to an increase in GDP deflator and decrease in real GDP in the short run. But in the long run, as prices and wages adjust, the output returns to its long run level so there is no change in real GDP. But the GDP deflator increases in the long run

Hence, the long-run effect of a negative supply shock is is GDP deflator increases, no change in RGDP

Therefore, option C is correct.