From the diagram, identify the initial equilibrium, short-run equilibrium, and the long-run equilibrium based on the three scenarios below. In each scenario, explain your answers and identify what happened to the price level and aggregate output. Scenario 1. The economy initially in the long-run equilibrium at point A, and cost shock causes cost-pushed inflation. The government reacts by implementing expansionary fiscal policy. [Hint: Step 1: Explain how the cost shock causes disequilibrium and Step 2: What happened to the price level and aggregate output following the government intervention.] Scenario 2. The economy initially in the long-run equilibrium at point A, and an increase in government purchases causes demand-pull inflation. In the long run, wages respond to the inflation.[Hint: Step 1: Explain how the government purchases causes disequilibrium through demand-pull inflation and Step 2: What happened to the price level and aggregate output when wages in the economy respond to the inflation.]
From the diagram, identify the initial equilibrium, short-run equilibrium, and the long-run equilibrium based on the three scenarios below. In each scenario, explain your answers and identify what happened to the price level and
Scenario 1. The economy initially in the long-run equilibrium at point A, and cost shock causes cost-pushed inflation. The government reacts by implementing expansionary fiscal policy. [Hint: Step 1: Explain how the cost shock causes disequilibrium and Step 2: What happened to the price level and aggregate output following the government intervention.]
Scenario 2. The economy initially in the long-run equilibrium at point A, and an increase in government purchases causes demand-pull inflation. In the long run, wages respond to the inflation.[Hint: Step 1: Explain how the government purchases causes disequilibrium through demand-pull inflation and Step 2: What happened to the price level and aggregate output when wages in the economy respond to the inflation.]
Scenario 3. The economy initially in the long-run equilibrium at point C, and the federal government implements an increase in corporate income taxes and personal income taxes. In the long run, firms and workers adjust to the new price level and costs adjust accordingly.[Hint: Step 1: Explain how government taxes on corporate and personal income causes disequilibrium and Step 2: What happened to the price level and aggregate output when firms and workers adjust to the new price level and costs adjust accordingly.]
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