Using aggregate demand,short-run aggregate supply, and long-run aggregatesupply

Question

Using aggregate demand,short-run aggregate supply, and

long-run aggregatesupply curves, explain the process by

which each of thefollowing economic events will move the

economy from onelong-run macroeconomic equilibrium to

another. Illustratewith diagrams. In each case, what are the

short-run and long-runeffects on the aggregate price level

and aggregateoutput?

a. There is adecrease in households’ wealth due to a decline

in the stockmarket.

b. The governmentlowers taxes, leaving households with

more disposable income,with no corresponding reduction

in government purchases.

Explanation / Answer

Don't know how to draw thegraphs here. Hope my wordings help. a) Suppose that before the change, the price is P and the outputlevel (also the long-run output level) is Y. A decrease in households' wealth will result in a left shift of theshort run aggregate demand curve (SRAD), which leads to a lowerprice P1 such that P1

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