The U.S. Congress regularly enacts legislation that suspends or reduces import t

Question

The U.S. Congress regularly enacts legislation that suspends or reduces import taxes for 2 or 3 years on certain imports, including raw materials and intermediate goods that are not made in the United States but that are vital for U.S. manufacturing. This legislation reduces the cost of U.S. manufacturing, causing a rightward shift of the short-run aggregate supply (SRAS) curve. This situation is depicted below in the movement of the cconomy from point A to point B. In the figure below, shift the appropriate curve to depict hovw the economy reacts in the long run, when all prices are flexible. You may assume that the shift of the SRAS curve does not have an impact on the long-run aggregate supply curve. To refer to the graphing tutorial for this question type, please click here. PriceLevel P) LRAS2 ? 14,18 > 12 OF 18 QUESTIONS COMPLETED + VIEW SOLUTION SUBMIT ANSWER

Explanation / Answer

As SRAS shifts rightward in short run, the economy moves from point A to point B, where price level is lower and real GDP is higher than in long-run equilibrium. In the long run, wages and prices being flexible, lower price level causes a rightward shift in aggregate demand curve, to AD2 as is shown in the second graph. In long run equilibrium, AD2 will intersect SRAS2 at a further lower price level and restoring real GDP to potential GDP.

Note that the second graph is correctly drawn.

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