The economy in the diagram below begins in long-run equilibrium at E₀. FIGURE 30-2 Refer to Figure 30-2.Suppose the economy is in a short-run equilibrium at E₁ after a negative supply shock.Cyclical unemployment at E₁ can be reduced by

Question

Quizplus · Accepted Answer

Option A suggests implementing an expansionary monetary policy that can shift the AD curve to the right and create a new equilibrium point at E₂. This policy will increase aggregate demand and thus decrease cyclical unemployment, making it the best choice. Reducing government purchases (Option B) and increasing taxes (Option C) will reduce the aggregate demand and not help in reducing unemployment. Option D suggests a contractionary monetary policy that will shift the AS curve and return the economy to its initial equilibrium position, but it will not reduce the cyclical unemployment caused by the negative supply shock. Option E addresses the long-term structural unemployment issue and is not relevant in the short-term for reducing cyclical unemployment caused by the supply shock.

The Economy in the Diagram Below Begins in Long-Run Equilibrium