ECONOMICS (CBSE/UGC NET)

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ECONOMICS

AGGREGATE DEMAND

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ____ in real GDP in the short run and ____ in inflation in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)
A
an increase; a decrease
B
an increase; an increase
C
no change; a decrease
D
no change; an increase
Explanation: 

Detailed explanation-1: -How much an economy is able to produce ultimately depends on that country’s resources. In the lesson on short-run aggregate supply, we learned that producers respond to changes in the price level in the short-run, which is why we have the SRAS curve.

Detailed explanation-2: -What happens to inflation and output in the short run and the long run when government spending increases? An increase in government spending will lead to a rightward shift of the aggregate demand curve. In the short run, inflation and output will both rise.

Detailed explanation-3: -When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low at the natural rate of unemployment. For this reason, potential GDP is sometimes also called full-employment GDP.

Detailed explanation-4: -When an economy is temporarily operating at an output that is beyond its full-employment rate, which of the following is true? Excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment.

There is 1 question to complete.
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