Questions: Question 38 Which set of changes is definitely predicted to lower Real GDP in the short run? A The money supply rises and labor productivity rises. (B) The U.S. dollar depreciates and wage rates fall. (C) The U.S. dollar appreciates-and labor productivity rises. (D) Foreign real national income falls and wage rates rise.

The answer is (D): Foreign real national income falls and wage rates rise.

Explanation for each option:

A. The money supply rises and labor productivity rises.

• An increase in the money supply typically lowers interest rates, which can stimulate investment and consumption, leading to higher Real GDP. Additionally, an increase in labor productivity means more output can be produced with the same amount of labor, which also tends to increase Real GDP. Therefore, this set of changes is not predicted to lower Real GDP.

B. The U.S. dollar depreciates and wage rates fall.

• When the U.S. dollar depreciates, U.S. exports become cheaper for foreign buyers, which can increase demand for U.S. goods and services, potentially raising Real GDP. A fall in wage rates can reduce production costs for businesses, which might also lead to increased production and higher Real GDP. Thus, this set of changes is not predicted to lower Real GDP.

C. The U.S. dollar appreciates and labor productivity rises.

• An appreciation of the U.S. dollar makes U.S. exports more expensive for foreign buyers, which can reduce demand for U.S. goods and services, potentially lowering Real GDP. However, an increase in labor productivity can offset this by increasing output. The net effect on Real GDP is uncertain, so this set of changes is not definitely predicted to lower Real GDP.

D. Foreign real national income falls and wage rates rise.

• A fall in foreign real national income means that foreign consumers have less income to spend on U.S. exports, which can reduce demand for U.S. goods and services, potentially lowering Real GDP. Additionally, an increase in wage rates raises production costs for businesses, which can lead to reduced output and higher prices, further lowering Real GDP. Therefore, this set of changes is definitely predicted to lower Real GDP in the short run.

Summary: The set of changes that is definitely predicted to lower Real GDP in the short run is (D): Foreign real national income falls and wage rates rise.