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

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

Quizplus · Accepted Answer

Option A suggests using an expansionary monetary policy which involves decreasing interest rates to increase investment and consumption, ultimately increasing aggregate demand (AD) and shifting the AD curve to AD1, causing a new equilibrium at E2. This will help to reduce cyclical unemployment at E1. Options B and C involve reducing government purchases and increasing taxes, respectively, which will result in a decrease in aggregate demand and shifts AD curve to the left, worsening unemployment. Option D suggests using a contractionary monetary policy which involves increasing interest rates to decrease investment and consumption, ultimately decreasing aggregate demand and shifting the AD curve back to E0. This will only return the economy to long-run equilibrium, without addressing the issue of cyclical unemployment at E1. Option E is not a short-term solution and will take time to implement and produce results. Therefore, option A is the best choice to reduce cyclical unemployment at E1.

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