Answers
1) suppose government spending decreases. This leads to a decrease in the aggregate demand in the economy. In the short run, beginning from a long run equilibrium, this leads to a decrease in real GDP and decrease in GDP Deflator.
However, in the long run, as the wages and prices adjust, we find that the real GDP returns to its original level and the GDP deflator for the decreases.
Hence, the long run effect of decrease in government spending on the goods and services market is that GDP deflator decreases, no change in real GDP.
Therefore, option C is correct.
2) an increase in the amount of Technology increases the aggregate supply. This is because now the same amount of inputs can produce more output because of the advancement of Technology. Hence, the reason increase in the short run aggregate supply because no more can be supplied at each price.
Moreover the production capacity of the economy increases because of the advancement of Technology using the same amount of inputs oral sources available in the economy. This leads to an increase in long run aggregate supply. Hence an increase in the amount of Technology will shift short run and long run aggregate supply.
Therefore, option B is correct.
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