Figure 12-4
-Refer to Figure 12-4. Assume that the economy is initially at Y₁. If economists advocate
Policies to promote economic growth, such as those which encourage investment and work effort, which of the following would occur?

Question

Figure 12-4

-Refer to Figure 12-4. Assume that the economy is initially at Y₁. If economists advocate
Policies to promote economic growth, such as those which encourage investment and work effort, which of the following would occur?

Quizplus · Accepted Answer

Policies that encourage investment and work effort will lead to an increase in productivity and potential output in the long run. This will shift the LRAS curve to the right. In the short run, this will also lead to an increase in output and a shift in the SRAS curve to the right. Overall, there will be an increase in both short-run and long-run output levels, and this is represented by a shift to the right in both SRAS and LRAS. This will result in an increase in equilibrium output and a decrease in equilibrium price level, but aggregate demand will not necessarily decrease as it depends on the extent of the shift in SRAS and LRAS.

Figure 12-4 -Refer to Figure 12-4. Assume That the Economy Is Initially