10-16. For each question, suppose that the economy

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
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.
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.
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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