Question

The economy is in long-run equilibrium. Congress's passage of new laws significantly increasing the regulation of business. It is assumed that everything else stays constant. What do we expect in aggregate demand, short-run aggregate supply, and long-run aggregate supply in the short-run?

Explain what happens to short-run equilibrium price level and output

And what happens in the long run, and long-run equilibrium price level and output?

Explain your answer

Answer 1

If there are laws that makes doing business difficult then the cost of doing business will increase and that will shift the SRAS or short run aggregate supply curve to the left and the new equilibrium will be at a higher price and lower level of output. The aggregate demand in the market will remain the same as it was but there will be a movement along the curve to the left.

Long run supply curve will remain as it is in the short run. In the long, the demand will increase but the new equilibrium will be at a higher price and higher level of output. this is because in the long run, monetary policy or the fiscal policy can change in the market to adjust the unused potential in the market.