Homework SourseImagine the US economy is in longrun equilibrium Then suppos
| Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar increases. This has two effects: (1) people in the U.S. revise their expectations so that the expected price level falls, and (2) net exports decline. We would expect that in the short-run | |||||||||||||
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| Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar increases. This has two effects: (1) people in the U.S. revise their expectations so that the expected price level falls, and (2) net exports decline. We would expect that in the short-run | |||||||||||||
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Solution
It has been provided that value of US dollar increases leading to decline in net exports.
Net exports is an component of aggregate demand. Decline in net exports implies a decrease in aggregate demand as well. Given the short-run aggregate supply curve, this decrease in aggregate demand curve will bring a fall in real GDP in short-run.
However, as poeple has revised their expectations with respect to price level. Change in price level depends on the movement of SRAS curve. Price level might rise, fall or remain same.
Hence, the correct answer is option (D).
