Assume that the economy is starting at long-run equilibrium

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Assume that the economy is starting at a long-run equilibrium. Suppose firms become very optimistic about business conditions and invest heavily in new capital equipment. Assume there is no change in the long-run aggregate supply curve. a. Use the AD-AS model to show the short-run effect of this optimism on the economy. b. If the Fed and the government do not react to this investment boom, use the diagram from part (a) to show the new long-run equilibrium of the economy. What is the effect of this investment boom on the price level in the long run? c. Suppose both the Fed and the government want to stabilize the price level. Design a monetary policy and a fiscal policy that can do the job. Use a new diagram to show the effect of these policies on the economy.

Reference no: EM13983976

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