LRAS SRAS Problem Seven: ATDs Assume the economy is in long run equilibrium at P

Question

LRAS SRAS Problem Seven: ATDs Assume the economy is in long run equilibrium at Point B If planned investment increases, where would the economy move in the short run? What would GDP growth, the unemployment rate, the CPl, the PPl, and capacity utilization be like? If no intervention happens, where would the economy be in long run equilibrium? What is undesirable about that outcome? Assume again that the economy is in long run equilibrium at Point B. Give three examples of changes (also known as shocks) that could shift the short term equilibrium to D. 1. 2. 3.

Explanation / Answer

E WHERE AD 3 AND SRAS MEET

GDP GROWTH WILL INCREASE, UNEMPLOYMENT RATE WILL FALL, CPI WILL RISE, PRINCIPLES WILL DECREASE, CAPITAL UTILISATION WILL BE MORE THAN OPTIMAL

THE SHOCKS ARE

Increase in taxes, increase in interest rates, war

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