Question

8. value: 6.00 points Use the AS-AD model below to answer the following questions. In each case, assume the economy starts in long- and short-run equilibrium. The Macroeconomy in long and short-run equilibrium LRAS SRAS Price Level (base = 100) Real GDP (Y) reset Suppose the spread of democracy around the world increases consumer confidence in Canada. a. Drag the appropriate line in the correct direction to show the short-run effect on the AS-AD model. This will: increase output and lower the price level. increase output and raise the price level. reduce output and lower the price level. reduce output and raise the price level. b. Suppose the government takes no action to help the economy. Eventually, the price levelſ (Click to select) and output((Click to select) c. Suppose, instead, the government decides to take action to help the economy. The government can recommend: raising taxes and/or cutting spending. cutting taxes and/or raising spending. raising taxes and/or raising spending. cutting taxes and/or cutting spending. d. If Canadian government makes the appropriate policy response, what happens to price levels and output in the long run. In the long run, the price level (Click to select) and output (Click to select)

The options for the drop down bar are

- decreases

- returns to its initial value

-increases

Answer 1

a. With increase in consumer confidence, the AD curve shifts to the right. In the short run, prices and output will increases. a is correct.

b. If the government doesn't do anything, eventually, the aggregate supply will decrease due to the increased wages. This will bring the output back to its original level and the price level would increase even further.

c. If the government takes action, it would want to decrease the aggregate demand to bring it back to its original level. This can be done by raising taxes/ or cutting spending. a is correct.

d. If the government makes the appropriate policy response, price level and output will return to its original value.