The economy is in longrun equilibrium Technological change s

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effects are $30 billion, we would expect that in the long run. (C)

A. real GDP would be higher but the price level would be lower

B.both real GDP and the price level would be lower

C.real GDP would be higher but the price level would be the same

D.both real GDP and the price level would be higher

The answer is C, please explain why.

Solution

Ans

Real Gdp rises because LRAS rises. Prices fall because while LRAS rises AD does not rise proportionately. Note when LRAS rises SRAS will also shift downwards