72. the price level, assuming policymakers take no action. a. The stock market declines sharply, reducing consumers' wealth. b. The federal government increases spending on national defense. c. A technological improvement raises productivity. d. A recession overseas causes foreigners to buy fewer U.S. goods. Suppose the U.S. economy begins in long-run equilibrium. Concerns about global climate change cause the government to significantly restrict the production of electricity from fossil fuels. Because of this change in policy, foreign investors lose confidence in the economy, ar.d the dollar falls in foreign-exchange markets. Draw a diagram to show the short-run effect of these events, and explain why these changes occur. Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. a. Draw an aggregate-demand/aggregate- supply diagram to show the short-run effect of this optimism on the economy. Label the CHAPTER 20 AGGREGATE DEMAND AND AGGREGATE SUPPLY 471 new levels of prices and real output. Explain in words why the aggregate quantity of out- put supplied changes. b. Now use the diagram from part (a) to show the new long-run equilibrium of the econ- omy. (For now, assume there is no change in the long-run aggregate-supply curve.) Explain in words why the aggregate quan- tity of output demanded changes between the short run and the long run. c. How might the investment boom affect the long-run aggregate-supply curve? Explain. 14. In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In economy B, half of all workers have these nominal wage contracts, while the other half have indexed employment contracts, so their wages rise and fall automatically with the price level. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped short-run aggregate-supply curve? In which economy would a 5 percent increase in the money supply have a larger impact on output? In which economy would it have a larger impact on the price level? Explain. 13.
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