Question

Using the AS-AD model, analyze how the following events will affect an economy in the short-run and in the long-run perspective:

1. The government has abolished employees’ health insurance paid by employers;
2. The price of oil has increased;
3. A foreign country’s government has imposed restrictions on the country’s exports;
4. The government has initiated a program of investing in education;
5. The government has increased spending on healthcare

Answer 1

a) This will lower the wages and that will shift the SRAS curve to the right and the new equilibrium will be at a higher quantity and lower price . Not affect the LRAS in the market.

b) This will shift the SRAS to the left and new equilibrium will be at a higher price and lower output

c) This will reduce the demand and shift the demand curve to the left.

d) This will shift the SRAS to the right and LRaS to the right and the new equilibrium will be at a lower price and higher output.

e) This will shift the SRAS and the LRAS to the right.