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 then decreases