This year, a nations long run equilibrium real gdp and price level both increase. which of the following combinations of factors might simultaneously account for both occurances?
a. an isolated earthquake at the begining of the year desroyed part of the nation capital stock, and the nations govermnet significantly reduced its purchases of goods and services
b. there was a minor technological improvements at th end of the previous year, and the quanity of money in circulation rose significantly.
c. labor productivity increased somewhat throughout the year and consumers significatly increased their total planned purchases of goods and services.
d. the capital stock increased somehat during the year, and the quanity of money in circulation decreased.
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an isolated earthquake at the begining of the year desroyed part of the nation capital stock, and the nations govermnet significantly reduced its purchases of goods and services
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To determine which combination of factors could account for both an increase in long-run equilibrium real GDP and the price level, we need to understand the relationship between these variables.
Long-run equilibrium real GDP is determined by factors such as labor productivity, capital stock, and technological advancements. When any of these factors increase, it leads to an increase in the productive capacity of the economy and potentially higher long-run real GDP.
Price level, on the other hand, is influenced by factors such as changes in the quantity of money in circulation and shifts in aggregate demand or aggregate supply. When the quantity of money increases, it can lead to inflationary pressures and a higher price level.
Now let's examine each option and see if any combination of factors could explain both an increase in long-run equilibrium real GDP and the price level:
a. An isolated earthquake destroying part of the nation's capital stock and the government reducing its purchases of goods and services would likely lead to a decrease in long-run equilibrium real GDP due to the loss of productive capacity. It is not likely to cause an increase in both real GDP and the price level simultaneously.
b. A minor technological improvement and a significant increase in the quantity of money in circulation could potentially explain an increase in both long-run equilibrium real GDP and the price level. Technological advancements would increase productive capacity, leading to higher real GDP, while the increase in the quantity of money could drive prices up, leading to a higher price level.
c. An increase in labor productivity and a significant increase in consumers' planned purchases of goods and services can explain an increase in long-run equilibrium real GDP. However, there would not necessarily be a direct effect on the price level unless the increase in planned purchases exceeds the increase in productive capacity.
d. An increase in the capital stock would contribute to an increase in long-run equilibrium real GDP, while a decrease in the quantity of money in circulation might lead to a decrease in the price level. This combination does not account for both an increase in real GDP and the price level simultaneously.
Therefore, the combination of factors that might simultaneously account for both an increase in long-run equilibrium real GDP and the price level is option b: a minor technological improvement at the end of the previous year, and a significant increase in the quantity of money in circulation.