Suppose that the position of a nation's long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this event?
a. A rise in the value of the domestic currency relative to other world currencies.
b. An increase in the quantity of money in circulation.
c. An increase in the labor force participation rate
d. A decrease in taxes
e. A rise in real incomes of countries that are key trading partners of this nation.
f. Increased long-run economic growth.
To determine which factor might account for the increase in the long-run equilibrium price level while assuming the position of the long-run aggregate supply curve remains unchanged, we need to understand the relationships between the factors given.
The long-run aggregate supply (LRAS) curve represents the maximum output that can be produced in an economy when all factors of production are utilized at their normal levels. Any changes in the equilibrium price level must be due to factors that affect aggregate demand (AD) or the aggregate supply (AS) curve.
Let's analyze each factor to see if it could lead to an increase in the long-run equilibrium price level:
a. A rise in the value of the domestic currency relative to other world currencies: This factor could cause an increase in net exports, which would increase aggregate demand (AD). However, it would not directly affect the long-run equilibrium price level.
b. An increase in the quantity of money in circulation: This factor could increase aggregate demand (AD) as people have more money to spend. This increase in aggregate demand could lead to an increase in the long-run equilibrium price level.
c. An increase in the labor force participation rate: This factor would increase the supply of labor, which would shift the long-run aggregate supply (LRAS) curve to the right. This would increase output without affecting the price level.
d. A decrease in taxes: This factor would increase disposable income, which would increase consumer spending and aggregate demand (AD). However, it would not directly affect the long-run equilibrium price level.
e. A rise in real incomes of countries that are key trading partners of this nation: This factor would increase the demand for this nation's goods and services, leading to an increase in exports and aggregate demand (AD). However, it would not directly affect the long-run equilibrium price level.
f. Increased long-run economic growth: This factor would lead to an increase in the potential output of the economy, shifting the long-run aggregate supply (LRAS) curve to the right. This would increase output without affecting the price level.
After analyzing each factor, we find that the factor which could account for the increase in the long-run equilibrium price level while maintaining the position of the long-run aggregate supply curve is option (b): An increase in the quantity of money in circulation.
The correct answer is b. An increase in the quantity of money in circulation.
When the long-run aggregate supply curve has not changed, but the long-run equilibrium price level has increased, it suggests that there has been an increase in the overall level of prices in the economy. This can be caused by an increase in the quantity of money in circulation. When there is more money available, people have more money to spend, which can drive up prices in the economy. This increase in the quantity of money would lead to an increase in the general price level, without affecting the position of the long-run aggregate supply curve or other factors such as currency exchange rates, labor force participation rate, taxes, real incomes, or economic growth.