Use the (short run) Aggregate Demand/Aggregate Supply Model to determine which of the following would cause output to rise and the price level to fall.
A technological change in manufacturing has made labor more productive.
The federal government raises taxes on businesses.
The federal government lowers taxes on households.
The federal government runs a budgetary surplus.
Ans - A
Technological change makes labour more productive which leads to the increase in output with the same units of inputs (labour). Increase in output due to increase in productivity increases the short term aggregate supply that causes the price level to fall and increase in output.
In the given fig. Due to technological change SAS has shifted downwards which results in increase in output from Yo to Y1 and fall in price level from Po to P1.
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