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The AD/AS model is useful in predicting the effects of various shocks and policy changes on an economy. The model is based on goods and services being exchanged in well-functioning markets. In general, however, markets are not always perfect. Consider how the model would change as a result of market imperfections. (Hint: Can the AS/LRAS shift when there are governmental controls?)
A- How would the AD/AS model change if input prices, such as wages and raw material prices, were set by the government rather than in markets?
B- If the government sets input prices, what long-run effect would this have?
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