Optimistic about future business conditions

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Reference no: EM131194457

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.

(a) Draw an AD-AS diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and output.

(b) Use the diagram from part (a) to show the new long-run equilibrium of the economy. Explain in words why how the new long-run equilibrium is achieved.

Reference no: EM131194457

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