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Aggregate supply and aggregate demand in Lithuania were in their long run equilibrium. Then consumers decided...

  1. Aggregate supply and aggregate demand in Lithuania were in their long run equilibrium. Then consumers decided to spend less and save more.
    1. In a well-labeled graph, show how aggregate demand, aggregate supply, and the equilibrium change in both the short and long run (6 points).
  1. Explain what happened to the economy, especially the price level and output, in the short and long run (2 points).
  1. Show (in a pair of graphs) what the central bank could do to offset the decrease in consumer spending (4 points).
  1. Explain how the central bank’s actions work (2 points)
  1. Suppose that the Lithuanian government decided to increase government spending by 50 million Euro to try to offset the decrease in consumer spending.
    1. Explain how this might increase aggregate demand by more than 50 million Euro (3 points).
  1. Explain how this might increase aggregate demand by less than 50 million Euro (3 points).
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Answer #1

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