12 For each of the following events explain the shortrun and

12. For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. a. The stock market declines sharply reducing consumers\' wealth. b. The federal government increases spending on national defence. c. A technological improvement raises productivity d. A recession overseas causes foreigners to buy fewer Canadian goods.

Solution

a. If there is reduction in the wealth of consumers due to sharp decline in the stock value, then it will reduce the aggregate demand of goods in the market and it will also bring price level at lower level. Overall, it will reduce price level and output in the short run. But in the long run, the price level may further come downn as the output in the economy will remain more or less stable.

b. Increase in the government spendings on Defense will reduce government\'s expenditure on other sectors especially health, social security and infrastructure. It will reduce capital investment in the economy and will affect the output and aggregate supply in the economy.   In the short run, it will reduce output and raise the price level in the economy but in the long run, output will be stable at certain level and price level may fluctuate depending upon consumer\'s incomes, tastes, preferences and other factors.

c. Improvement in technology that raises productivity will always reduce the price level and increase output in the short run as well as long run.

d. A recession in foreign countries that reduces the demand of the canadian goods in international market, will not have much impact on both price level and output in the Canadian economy in the short run. However, in the long run, it will impact the output and supply of goods when there will be fall in domestic demand and both output and price level will fall.