Question

A synchronous decrease in energy prices and an increase in government spending will result in:
A) increases in output and a decrease in the price level in the long run.
B) Increase in short run aggregate supply and in aggregate demand
C) Increase in long run aggregate supply and a rightward shift in aggregate demand
D) A leftward shift in short run aggregated supply
E) Decrease aggregate demand and increase short run aggregate supply​

Answer 1

Answer:

B) Increase in short run aggregate supply and in aggregate demand

Explanation:

In the case when there is a rise in  the government spending  so it would be increases aggregate demand. As AD curve shifts to the rightward, that rise the level of the price and increase in GDP.

On the other hand, if there is a decreasing in energy prices so it decreased the production cost, which rise aggregate supply. As AS curve shifts rightward, due to this it decrease the price level and increase the GDP.

So, The net impact is a definite increase in GDP, but the impact on price level is non-certain. As price level of the short run is non-certain, so we are not able to predict long run impacts.