Suppose the economy is initially in long-run equilibrium. Then, suppose a new technology is introduced that boots productivity across key strategic sectors in the economy. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
a- Prices rise and output falls.
b- Prices fall and output falls.
c-Prices fall and output rises.
d- Prices rise and output rises.
Option C is correct - Price falls and output rises
The introduction of new technology increases productivity in the economy. Increase in productivity means that now more output can be produced using same amount of labors or factors of production.
This increase in productivity will shift the short run aggregate supply curve (SRAS) to the right. This rightward shift in the SRAS curve (keeping the aggregate demand curve the same) will lead to increase in output level and decrease in the price level.
This indicates that greater output can be produced at every price level now. Thus an introduction of new technology that improves productivity leads to fall in price level and rise in output.
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