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According to the LRAS-SRAS-AD macroeconomic model, if an economy is initially in long-run equilibrium, a boom in one of this economy's major trading partners will: a
According to the LRAS-SRAS-AD macroeconomic model, if an economy is initially in long-run equilibrium, a boom in one of this economy's major trading partners will:
a. increase output and prices in the short run and the long run.
b. decrease output and increase prices in the short run and the long run.
c. increase output and decrease prices in the short run and the long run.
d. increase output and prices in the short run, but decrease output in the long run.
e. increase output and prices in the short run, but only prices in the long run.
Expert Solution
- The correct option is (e) - increase output and prices in the short run, but only prices in the long run.
The international trade makes the economies to be interlinked with each other; therefore, if a boom is experienced in one economy then it will lead to a boom in its trading nations' as well and similarly, goes with the other phrases of the business cycle.
Henceforth, it can be inferred that boom in one of the major trading nation will lead to a rise in the demand in other nations which cause a rise in both the price and output level in the short-run; however, in the long run, the actual output equalized with the potential output making a rise in the price level only.
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