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 aggregate supply shock.If the governmentʹs policy objective is to reduce unemployment,which of the following policies would be appropriate?

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 aggregate supply shock.If the governmentʹs policy objective is to reduce unemployment,which of the following policies would be appropriate?

Quizplus · Accepted Answer

In the short-run, there is a decrease in output and increase in price level due to the negative aggregate supply shock. To reduce unemployment, the government should increase aggregate demand. One way to increase aggregate demand is through increased government spending on infrastructure, such as a cross-country highway renewal program. This would create jobs and increase output, ultimately reducing unemployment. Therefore, E is the appropriate policy choice. The other options (A, B, C, and D) do not directly address the issue of increasing aggregate demand and reducing unemployment.

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