A) Suppose the economy is initially in long-run macroeconomic equilibrium when i

Question

A)

Suppose the economy is initially in long-run macroeconomic equilibrium when it experiences a supply shock caused by a severe increase in input prices. If the government implements stabilization policy to offset the supply shock, they can effectively eliminate all of the economic effects of the shock.( TRUE/FALSE)

B)

A simultaneous rise in labour productivity and nominal wages would result in a lower price level in the short run if the rise in nominal wage is smaller than the rise in labour productivity.(TRUE/FALSE)

C)

In the long run, if all output prices and input prices doubled, then real GDP supplied would

A.  remain the same

B.  double

C.  increase

D.  fall

Suppose the economy is initially in long-run macroeconomic equilibrium when it experiences a supply shock caused by a severe increase in input prices. If the government implements stabilization policy to offset the supply shock, they can effectively eliminate all of the economic effects of the shock.( TRUE/FALSE)

B)

A simultaneous rise in labour productivity and nominal wages would result in a lower price level in the short run if the rise in nominal wage is smaller than the rise in labour productivity.(TRUE/FALSE)

C)

In the long run, if all output prices and input prices doubled, then real GDP supplied would

A.  remain the same

B.  double

C.  increase

D.  fall

Explanation / Answer

QA) False

Increasing the input price increases the product cost, which reduces supply by shifting the aggregate supply curve to the left. This is a supply shock, and it can’t be eliminated completely although there is stabilization policy of keeping the price level in control; such as aggregate demand should fall if the earnings of suppliers are down.

QB) True

It decreases the price level.

Labor productivity = Labor output / Labor input

If such productivity is increased, the firm gets higher number of units by applying the same labor units. Although there is an increase in wage rate, it is segregated among the higher number of units and making the labor cost per unit down. It decreases total cost and price level.

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