Question 45 (1 point) If a drought reduces agricultural output and at the same t

Question

Question 45 (1 point) If a drought reduces agricultural output and at the same time government spending increases, what will happen to equilibrium RGDP and equilibrium price level in the US? 1) Price level in the economy will fall and the effect on equilibrium RGDP is ambiguous 2) Price level in the economy will rise and the effect on equilibrium RGDP is ambiguous. 3) Equlibrium RGDRQwill rise and the effect on equilibrium price level is ambiguous 4) Equilibrium RGDP will all and the effect on equilibrium price level is ambiguous.

Explanation / Answer

Ans

B is right. Here supply shifts leftwards and Aggregate demand rightwards. Both led to rise in price. But it is not clear which effect is greater. So effect on output is ambiguos

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