How does an economy's behavior in short run differs from the long run.

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Chapter 23.2, Problem 2QQ

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How does an economy's behavior in short run differs from the long run.

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11. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the proc- ess by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output? a. There is a decrease in households' wealth due to a decline in the stock market. b. The government lowers taxes, leaving households with more disposable income, with no correspond- ing reduction in government purchases.

3. Explain how each of the following will affect aggregate demand. In each case, draw a diagram to show the effect on the aggregate demand curve. (a) Negative economic indicators cause firms to become pessimistic about the future of the economy. (b) Banks become complacent and begin taking on riskier business loans at lower interest rates. (c) The government passes legislation that increases the rate of corporate taxes. (d) Inflation leads the central bank to increase the base interest rate.

2. Describe the concept of aggregate demand and aggregate supply?