PROBLEM 1: Improvements in technology Consider an economy that is initially in a LR equilibrium. (point...

PROBLEM 1: Improvements in technology Consider an economy that is initially in a LR equilibrium. (point 1) Suppose improvements in technology lead to an increase in potential output. a) Show the short-run effects of this change in the 5 graphs of the AS/AD model. Label the new short-run equilibrium as point 2. b) Next, show the economy’s new long-run equilibrium. Do this by shifting the curve(s) that change over time to move the economy to the new long-run equilibrium. Use an arrow to indicate which direction the curve(s) have shifted. Label the new long-run equilibrium point as point 3. c) Suppose now that the central bank wants to implement a policy at point 2. What type of policy should be implemented? (The options are: no change, tighten, or ease.) Use an arrow to indicate which direction the curve(s) have shifted. Label the new long-run equilibrium point as point 4. d) Compare the two long-run equilibria point 3 and 4.

Expert Solution

Rahul Sunny answered 1 year ago

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