I. The government in a certain economy has offered all businesssignificant investment tax credits. Firms as a result investheavily in new capital equipment and households have takenmortgages to buy new homes.
- Draw an aggregate-demand/aggregate supply diagram showing theshort-run effect of the investment tax credits on the economy.Label the new levels of prices and real output. Explain in wordswhy the aggregate quantity of output suppliedchanges.
- Now use the diagram that you have drawn from part (a) to showthe new long-run equilibrium of the economy. (Assume here, there’sno change in the long run aggregate-supply curve.) Explain in wordswhy the aggregate quantity of output demanded changesbetween the short run and the long run.
- How might the investment boom affect the long-run aggregatesupply curve? Explain.
II. Explain whether each of the following events will increase,decrease or have no effect on the long-run aggregate supply.
- The discovery of iron ore deposits in the United States.
- Intel invents a new and more powerful computer chip.
- Congress raises minimum wage to $18.
- The United States experience a significant decline inimmigration.
- The price of raw material sharply increases.
