Question

If the economy experiences a severe recession (10% unemployment), would that mean the DAS Potential output, C+I+G+NX curves shift left (or up) and we quickly get a new long run equilibrium with higher prices and lower output?

Answer 1

DUe to great recession there will be a less tax revenue to the government due to unemployment and falll thus leads the government to borrow money thus makes the government to take borrowings.

So at this moment to overcome recession the Government increases the tax thus reducing the consumer spending this makes the IS curve to move left in downward direction. Thus during the long run to overcome recession the Government increases the price level thus creating demand for money which leads to low output of National Incomes due to higher prices.