In each scenario, explain your answers and identify what happened to the price level and aggregate output. (a) 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. (b) 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. (c) Scenario 3: The economy initially in the long run equilibrium at point C, and the federal government implements an increase in corporate income taxes
In each scenario, explain your answers and identify what happened to the
(a) 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.
(b) Scenario 2: The economy initially in the long run equilibrium at point A, and an increase in government purchases causes
(c) 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.
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