10-16. For each question, suppose that the economy
10-16. For each question, suppose that the economy | ||||||||
begins at the long-run equilibrium point A in the | ||||||||
diagram below. Identify which of the other points | ||||||||
on the diagram—points B, C, D, or E—could | ||||||||
represent a new long-run equilibrium after the | ||||||||
described events take place and move the economy | ||||||||
away from point A. (See page 219.) | ||||||||
a. Significant productivity improvements occur, | ||||||||
and the quantity of money in circulation | ||||||||
increases. | ||||||||
B | ||||||||
LRAS shifts to right due to productivity increases | ||||||||
monet suppply increse causes AD to increase and shift to right | ||||||||
this leads us to point B | ||||||||
b. No new capital investment takes place, and a | ||||||||
fraction of the existing capital stock depreciates | ||||||||
and becomes unusable. At the same time, the | ||||||||
government imposes a large tax increase on the | ||||||||
nation’s households. | ||||||||
C | ||||||||
LRAS shifts to left due to unusable capital that is equivalent to loss of resources.productivity increases | ||||||||
a tax will reduce consumption, shifting AD to left | ||||||||
this leads us to point C | ||||||||
c. More efficient techniques for producing goods | ||||||||
and services are adopted throughout the economy | ||||||||
at the same time that the government | ||||||||
reduces its spending on goods and services. | ||||||||
E | ||||||||
LRAS shifts to right due to more efficient techniques | ||||||||
the lower government spending will reduce AD, so that it shifts to left | ||||||||
this leads us to point E |
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