The University of Alabama
Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one long-run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output? a. There is an increase in taxes on households. b. There is an increase in the quantity of money. c. There is an increase in government spending.
In the long run, when the government pursues an accommodative policy, the output in the economy will be $80 billion and the price level will be $90 billion.
Due to the increase in the prices of oil and consequently the increase in the cost of producing goods and services in the economy, the short-run aggregate supply curve shifts to the left. As a result, in the short run, the output is established at a level lower than the natural level of output.
Now, the government pursues an accommodative policy in anticipation of the fall in output.
As a result, the AD curve shifts to the right, and the long-run equilibrium is restored at the natural level of output but at a higher price level than before.
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