Question

For each of the cases below, indicate whether the price level and level of real GDP will go "up","down", or stay the same." Assume that prices are flexible in both directions unless the information given indicates otherwise. The term in parentheses indicates whether the economy is operating in the immediate short run, short run, or long run. Answers may be used more than once. Expansionary fiscal policy. (long run) A. Price level down; real GDP same Development of alternative energy sources reduces oil B. Price level up; real GDP down prices. (short run) C. Price level uncertain; real GDP down (don't fall for this one, *Farm productivity improves because of technological either) improvements. (long run) D. Price level same; real GDP same • Fed engages in easy money policy. (immediate short run) E. Price level same; real GDP up Businesses become pessimistic about future demand for F. Price level down; real GDP up the goods they sell and postpone planned purchase G. of new capital. (immediate short run) H. Price level up: real GDP up • Development of an effective new COVID-19 vaccine encourages household spending (short run, with a price level that is upwardly flexible but downwardly inflexible) J. Price level up: real GDP same K. • The Federal government reduces the budget deficit by Price level down; real GDP down raising taxes. (short run, with a price level that is upwardly L. Price level uncertain; real GDP uncertain (don't fall for it) flexible but downwardly inflexible) M.Price level same; real GDP down • Imports of televisions, cars, and other durable goods increase. (long run) • The U.S. dollar appreciates against foreign currencies (each U.S. dollar will buy more foreign currency units; each foreign currency unit will buy fewer U.S. dollars) (short run) I. • Greater regulations on business activity drive up production costs. (short run)

Answer 1

Answer:

1- Price level down; real GDP up. Expansionary fiscal policy means government increases its expenditures and reduces tax rates it will decrease prices and increase the aggregate demand as expenditure by government will increase the production level the GDP will go up

2- Price level down; real GDP up as fall in oil price will lead to fall in prices of other goods as transportation cost decreases the AD (aggregate demand) will increase and GDP will also rise

3- Price level will go down and GDP will go up as improvement in farm productivity due to technology will reduce cost of production and prices will fall AD will increase so does the real GDP

4- Price level same, real GDP same. Immediate short run is the very shortest period where price level is fixed or does not change and due to easy money policy the real GDP will go up

5- Price level same as its immediate short run but real GDP will fall as businesses become pessimistic

6- Price level up; real GDP goes down as increase in household spending will lead to increase in price level which will further lead to fall in aggregate demand and GDP will decrease

7- Price level goes up due to rise in taxation and real GDP go down as rise in taxes reduces aggregate demand

8- Price level goes up ; real GDP goes down as increase in imports will make net exports negative which will lead to fall increase GDP

9- Price level goes down ; real GDP up as appreciation of dollar will increase its value which will lead to fall increases and the foreign trade will be beneficial which will increase real GDP

10-Price level goes up ; real GDP go down as increase in production cost will lead to increase in prices and the aggregate demand will fall so does the GDP