Question

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
a) an increase; an increase
b) a decrease; a decrease
c) no change; an increase
d) no change; a decrease

Answer 1

Answer:

d) no change; a decrease

Explanation:

The Real GDP (gross domestic product) is a macroeconomic term which is the measurement of the value of services and goods produced by economy in a certain or specific time period compared to normal GDP.  The influencer elements of Real GDP are very miscellaneous due to long run and short run periods. Then, the determinants which impact on the long run growth of an economy are:

1) Growth of productivity that means the ratio of economic outputs to inputs

2)Demographic changed that means the change of quantity or quality of employment, age structure and etc.

3)Labor Force participation which means that which amount participation there is in labor activities.

As seen above, the consumer and business confidence will not have any positive or negative effect on the real GDP.

Inflation is one of the most important macroeconomic indicator that intends the rate how the purchase power of the money is falling  by the rising on the price levels of goods and services. In long run, the most influencing element for inflation is the rate of money supply but if we consider business and consumer confidence are the positive things for the developing of GDP, then they will have a little bit decrease effect on inflation.