Question

President George W. Bush encouraged Americans to go out and spend money to boost the American economy after 9/11. How would this affect the economy in the short-run (include inflation, real GDP, and unemployment)? How would this affect long-run economic growth?

Answer 1

In the short run an increase in the demand will shift the aggregate demand curve to the right and the new equilibrium in the economy will be at a higher price and higher output. at a higher output the unemployment will fall and the inflation will rise, and as the output is high the real GDP will be high.

In the long run, the nominal wages will rise, and that will act as a negative supply shock that will shift the aggregate supply curve to the left, this will increase the price decrease the demand and real output, increase the unemployment and bring the GDP back to the long run equilibrium.