Economics Homework Help

Suppose the economy is already in its long run equilibrium. The government then decides to lower government

spending. Using the AD-AS model, what will be the short run effect?

Price level rises and output is unchanged

Price level rises and output rises

Price level falls and output falls

Price level falls and output rises

Consider the huge problem of individual debt which amounts to about $100,000 a year. Suppose the government decides to do the following: it will create a massive amount of money which it will then use to pay off all of the population’s debts (credit card, education, mortgage, etc.). Suppose the country is initially in its long run equilibrium. Using the AD-AS model, what will be the long run effect on the purchasing power of money?

Increases

Decreases

Unchanged

Increases then decreases