Figure 8-6
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. Suppose the federal government initiates a tax program that stimulates firms to increase their investment and this leads to economic growth. This policy might, in the short run, result in

Question

Figure 8-6 
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. Suppose the federal government initiates a tax program that stimulates firms to increase their investment and this leads to economic growth. This policy might, in the short run, result in

Quizplus · Accepted Answer

The tax program that stimulates firms to increase their investment will lead to an increase in aggregate demand, causing a rightward shift of the AD curve. This will lead to an increase in both the short-run and the long-run equilibrium output levels. In the short run, firms will increase production to meet the higher demand, leading to a temporary increase in prices and output. In the long run, however, the increase in investment will increase the economy's productive capacity, leading to a rightward shift of the long-run aggregate supply and the short-run aggregate supply curves. Thus, the economy will return to its potential output level, but with a higher real GDP than before the tax program was implemented.

Figure 8-6 -Refer to Figure 8-6. Assume That the Economy Is Initially