Question

Suppose that the position of a​ nation's long-run aggregate supply​ (LRAS) curve has not​ changed, but its​ long-run equilibrium price level has increasedincreased. FACTOR
(a) A rise in the value of the domestic currency relative to other world currencies
(b) An increase in the quantity of money in circulation
(c) An increase in the labor force participation rate
(d) A decrease in taxes
(e) A rise in real incomes of countries that are key trading partners of this nation
(f) Increased​ long-run economic growth

Of the factors given​ above, which could account for the price level increaseincrease with constant​ LRAS?

(A) Factors​ a, c, and f.
(B) Factors c and f.
(C) Factors​ b, d, and e.
(D) Factors​ b, c,​ d, and f.

Answer 1

Answer: (D) Factors B, C, D & F

Explanation:

Factor B: An increase in the quantity of money in circulation implies inflation. This will definitely cause a rise in the price level of goods and services in the nation.

Factor C: An increase in the labour force participation rate implies an increase in the quantity supply of labour. This implies an increase (general increase, not per labourer) in the price paid for labour (wages and salaries) in the nation.

Factor D: A decrease in production taxes paid by firms will encourage more production. This increase in supply of goods and services produced will result in an increased price level. The LRAS curve still won't shift. It will remain constant but along the curve, price level and quantity level will have increased.

On the other hand - for individuals - a decrease in income tax implies higher purchasing power (higher income-after-tax). This will in turn raise the prices of the goods and services purchased by individuals.

Factor F: Increased long run economic growth means increased productivity (or Gross Domestic Product) in the economy. This usually has the effect of raising inflation rate which directly impacts price level in the economy/nation.

For the wrong answers, here is the reason why they are wrong:

Factor (A)

A rise in the value of domestic currency, relative to other world currencies, does the damage of (or has the effect of) reducing the quantity of goods imported from this country by other countries. This will in turn reduce the quantity of goods exported by this country and hence, quantity produced will reduce in this country. This, instead of increasing price level, will reduce it.

Factor (E)

A rise in real incomes in trade partner countries does not mean that the extra real incomes will be used to purchase products from this country or to engage on foreign trade with this country.

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