1. Refer to the sets of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. Use the graphs to explain the process and steps by which each of the following economic scenarios will shift the economy from one long-run macroeconomic equilibrium to another equilibrium. Under each scenario, elaborate the short-run and long-run effects of the shifts in the aggregate demand and aggregate supply curves on the aggregate price level and aggregate output (real GDP).
a. Suppose the household wealth decreases due to a decline in the stock market asset prices (See the set of graphs below and pay attention to the 3-stage shifts in graphs).
b. Assume the government lowers taxes, which increases the household’s disposable income. However, the government purchases (spending) remains the same. (See the set of graphs below and shifts in graphs)