Suppose an economy is initially in a long run equilibrium in an AD-AS diagram, after the economy has recovered from the Covid-19 pandemic, consumers increase their consumption spending.
a. Explain how the rise in consumer spending affects the AD curve. How does this affect the economy's short-run equilibrium?
b. In addition to a) above, suppose the economy experiences a favorable inflation shock, how does this affect the AS curve? (use the same diagram as in part (a) above.
c). Again, using the same AD-AS diagram, What choice the government must make now regarding the stabilization policy?
