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Exhibit: Aggregate Demand and Investment 1
-(Exhibit: Aggregate Demand and Investment 1) The economy is in short-run equilibrium. To move the economy to a long-run equilibrium, policy makers should

Question

Use the following to answer questions.
Exhibit: Aggregate Demand and Investment 1 
-(Exhibit: Aggregate Demand and Investment 1) The economy is in short-run equilibrium. To move the economy to a long-run equilibrium, policy makers should

Quizplus · Accepted Answer

To move the economy from a short-run equilibrium to a long-run equilibrium, policy makers should aim to close the recessionary gap by reducing interest rates and encouraging investment. This will increase aggregate demand in the economy, leading to an increase in output and employment levels. Increasing interest rates and discouraging investment would only worsen the recessionary gap, while increasing interest rates and encouraging investment would exacerbate the inflationary gap.

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