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Shock after the economy self-adjusts

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Reference no: EM131369398

Suppose the economy begins at full employment, "An increase in personal income taxes shocks," use aggregate demand and aggregate supply analysis to:

a. Analyze the short-run impact: begin by saying what causes the curve to shift. Explain what happens to inflation, real interest rates, exchange rates, consumption, investment and net exports and output.

Use the AS-AD graph to illustrate and please explain why the variables changes as you have indicated.

b. Discuss the long-run impact of the shock after the economy self-adjusts. Illustrate with the graph and explain why output returns to potential.

Reference no: EM131369398

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