Suppose an economy is operating at near full capacity, with an initial short-run equilibrium at the intersection of AD0 and AS0 that occurs where aggregate supply is very steep and almost vertical. What would be the impact of an increase in consumer confidence and business optimism in this economy?
In this situation, an increase in consumer confidence and business optimism will shift aggregate demand right. As a result, GDP will rise but by less than the rise in GDP and prices will rise by more than the rise in GDP.
Suppose an economy is in an initial short-run equilibrium. What would be the impact of a tax cut, holding government purchases constant, with the economy operating well below full capacity (on the lower left part of the aggregate supply curve)?
In this situation, a tax cut holding government purchases constant will shift aggregate demand right. As a result, GDP will rise and prices will rise but by less than the rise in GDP.
Suppose an economy is in an initial short-run equilibrium. What would be the impact of an increase in the money supply with the economy operating at near full capacity?
In this situation, an increase in the money supply will shift aggregate demand right. As a result, GDP will rise and prices will rise but by less than the rise in GDP.