The economy in the diagram below begins in long- run equilibrium at E₀.
FIGURE 31- 2
-Refer to Figure 31- 2. Suppose the economy is in a short- run equilibrium at E₁after a negative supply shock. Cyclical unemployment at E₁can be reduced by

Question

The economy in the diagram below begins in long- run equilibrium at E₀.

The economy in the diagram below begins in long- run equilibrium at E<sub>0</sub>. FIGURE 31- 2 -Refer to Figure 31- 2. Suppose the economy is in a short- run equilibrium at E<sub>1</sub><sub> </sub>after a negative supply shock. Cyclical unemployment at E<sub>1 </sub>can be reduced by A) increasing taxes to cause the AD curve to shift to AD<sub>1</sub><sub> </sub>and a new equilibrium at E<sub>2</sub>. B) a contractionary monetary policy that shifts the AS curve back to AS<sub>0</sub>, returning the economy to equilibrium at E0. C) an expansionary monetary policy that shifts the AD curve to AD<sub>1</sub><sub> </sub>and a new equilibrium at E<sub>2</sub>. D) reducing government purchases to cause the AD curve to shift to AD<sub>1</sub><sub> </sub>and a new equilibrium at E<sub>2</sub>. E) expanding education and training programs for unemployed workers.

FIGURE 31- 2
-Refer to Figure 31- 2. Suppose the economy is in a short- run equilibrium at E₁after a negative supply shock. Cyclical unemployment at E₁can be reduced by

Quizplus · Accepted Answer

An expansionary monetary policy, through lower interest rates, increases the level of investment and consumption, thus increasing aggregate demand (AD). This will shift the AD curve to the right, from AD₁ to AD₂, leading to a new equilibrium at E₂. This will reduce cyclical unemployment back towards its natural rate. The other choices do not directly address the shortfall in aggregate demand caused by the negative supply shock.

The Economy in the Diagram Below Begins in Long- Run