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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