I. The government in a certain economy has offered all business significant investment tax credits. Firms...

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Economics

I. The government in a certain economy has offered all businesssignificant investment tax credits. Firms as a result investheavily in new capital equipment and households have takenmortgages to buy new homes.
Draw an aggregate-demand/aggregate supply diagram showing theshort-run effect of the investment tax credits on the economy.Label the new levels of prices and real output. Explain in wordswhy the aggregate quantity of output suppliedchanges.
Now use the diagram that you have drawn from part (a) to showthe new long-run equilibrium of the economy. (Assume here, thereâ€™sno change in the long run aggregate-supply curve.) Explain in wordswhy the aggregate quantity of output demanded changesbetween the short run and the long run.
How might the investment boom affect the long-run aggregatesupply curve? Explain.
II. Explain whether each of the following events will increase,decrease or have no effect on the long-run aggregate supply.
The discovery of iron ore deposits in the United States.
Intel invents a new and more powerful computer chip.
Congress raises minimum wage to $18.
The United States experience a significant decline inimmigration.
The price of raw material sharply increases.

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4.1 Ratings (642 Votes)

I We assume that economy is in long run and short runequilibirium This means LRAS SRAS and AD curve intersects atcommon point e We shall then understand how changes in theinvestment affect SR and LR equilibiriuma Investment tax credit Positive demand shock is a taxpolicy to stimulate aggregate demand in the economy It works byboosting investments and causing quantity of capital goods orinvestment goods to rise They will further boost up production ofgoods and services in the economy This will also causeunemployment level to decline in the economy One thing should benoted that quantity supplied had also increased due to price riseas firms find it more See Answer

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