Question

Suppose foreign incomes decrease. Which of the following would occur in the short-run?

A. Group of answer choices

B. A decrease in profits will lead to a decrease in firm production

C. Short-run Aggregate Supply will increase

D. Short-run Aggregate Supply will decrease

E. A decrease in resource costs will increase profits and production

Suppose much of a country's infrastructure, buildings, and machinery are destroyed during a war. What would be the long-run effect of this event?

Group of answer choices

A. No change in Real GDP, an increase in the GDP Deflator

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

C. No change in Real GDP, a decrease in the GDP Deflator

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

Answer 1

Q1.

Answer: D

SRAS will decrease.

As the foreign income decreases, the short-run supply to the foreign is not beneficial. This decreases firms’ aggregate supply.

Q2.

Answer: A

These are all production facilities, which are destroyed. This shifts SRAS curve to the left, and the AD curve to the right, establishing the long-run equilibrium at the potential level. Therefore, there would be no change in real GDP.

GDP deflator = NominalGDP/RealGDP

This increases the price level, meaning an increase in nominal GDP. Therefore, GDP deflator would increase.