Question

Use the AD/AS model below to answer the following questions. In each case, assume the economy starts In long- and short-run equilibrium. The Macroecono in long- and short-run equilibrium LRAS SRAS 100.0... AD Real GDP a. Suppose the spread of democracy around the world increases consumer confidence in the United States. Instuctions: Drag the appropriate line in the correct direction to show the short-run effect on the AD/AS model

The drop down menu for B is price level (decreases, increases, returns to initial value) and output (decreases, increases, returns to initial value)

The drop down menu for D is price level (decreases, increases, returns to initial value) and output (decreases, increases, returns to initial value)

Answer 1

Answer.)

a.) Increase in consumer confidence in United States would will encourage private spending and hence aggregate demand curve shifts rightward (from AD1 to AD2) . This creates Inflationary Gap.

LRAS SRAS AD2 Real GOP

Note that P1 indicates $100.

b.) As depicted in graph above, if government makes no effort to help economy, Price level increases from P1 to P2 and Output level also increases from Y_F to Y₁ .

c.) raising taxes and/or cutting spending.

D.) In the long run, the price level returns to initial value and output returns to initial value.