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