Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

Question

BlackTom AI · Accepted Answer

Question restatement: Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

Option a: There will be an increase in aggregate output demanded and the economy moves from point A to point G.
- This matches the typical short-run response to an increase in net exports (an autonomous demand shock). An increase in NX shifts AD to the right, raising real GDP and moving the economy from A toward a higher output point like G, while the price level may adjust accordingly in the short run. This option correctly captures the direction of the demand-side expansion and the movement along the AD/AS framework.

Option b: Since the economy is already at its potential output, only the price level will rise to P2.
- This describes a scenario where output remains at potential (no real GDP gain) and only prices rise, which would be more characteristic of a purely vertical long-run aggregate supply or demand-pull inflation with no output response. In the short run, an NX increase typically raises output as well, so this is not consistent with the scenario depicted.

Option c: Real GDP decreases to Y3 and the price level falls to P3.
- This describes a contractionary movement (lower GDP and lower price level), which would occur if aggregate demand fell or if supply shocks pushed the economy toward a lower equilibrium. An increase in NX is expansionary, so this option is inconsistent with the shock described.

Option d: Real GDP increases to Y2 and the price level rises to P2.
- While this option indicates a GDP rise, it specifies a particular level Y2 and price P2 that may not align with the graph’s labeling after a net export increase. If the diagram shows movement toward point G rather than Y2-P2, this could be an incorrect mapping of the short-run outcome to the depicted coordinates. The core issue is whether the move is to G; mislabeling of the exact coordinates makes this option dubious.

Option e: The economy rapidly moves to point E.
- Point E in the diagram is typically associated with a different combination of price level and output, often tied to a distinct shock or policy path. An NX increase does not necessarily imply a rapid move to E; the standard short-run response is a rightward shift along the demand curve, moving toward G rather than jumping to E. Therefore this is not the correct description of the short-run response.

Summary: Evaluating all options, option a correctly describes the standard short-run impact of higher net exports as an increase in aggregate demand, leading the economy from point A toward point G. The other options mischaracterize the direction of output change, price level response, or the specific diagrammatic movement.

Academic Courses Test#3

Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

View Explanation

Log in for full answers

Similar Questions

The graph below illustrates the effects of monetary policy that shifts the AD curve right. This will result in a in unemployment and a __ in the price level.

If the economy is at point A

At output level Yk,

Figure 33-6 Refer to Figure 33-6. Suppose the economy starts at A. If changes occur that move the economy to a new short-run equilibrium of P1 and Y1 , then it must be the case that

Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to

Assume this economy is initially producing an output of Y1. As the economy moves from Y1 to Y2 ___.

An increase in the price level ___.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

Academic Courses Test#3

Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

View Explanation

Log in for full answers

Similar Questions

The graph below illustrates the effects of monetary policy that shifts the AD curve right. This will result in a __________ in unemployment and a ____________ in the price level.

If the economy is at point A

At output level Yk,

Figure 33-6 ​ Refer to Figure 33-6. Suppose the economy starts at A. If changes occur that move the economy to a new short-run equilibrium of P1 and Y1 , then it must be the case that

Figure 33-5 ​ Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to

Assume this economy is initially producing an output of Y1. As the economy moves from Y1 to Y2 ___.

An increase in the price level ___.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

The graph below illustrates the effects of monetary policy that shifts the AD curve right. This will result in a in unemployment and a __ in the price level.

Figure 33-6 Refer to Figure 33-6. Suppose the economy starts at A. If changes occur that move the economy to a new short-run equilibrium of P1 and Y1 , then it must be the case that

Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to