Pessimistic about future business conditions

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Suppose the economy of Macroland is initially in a long-run equilibrium. Firms become pessimistic about future business conditions and cut back on investment spending.

a. Use the AD-AS diagram to show what happens to the price level and output in the short run.

b. If the policymakers in the central bank decide to take actions to stabilize output, should they increase or decrease money supply? Use the AD-AS diagram in part (a) to illustrate how this moves the economy back toward its natural level of output.

Reference no: EM133640726

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