Question

Assume the economy is on aggregate demand AD1. The Fed should attempt to raise investment by enough to shift aggregate demand from AD1 to _____.

Answer 1

Answer: d. AD2 and then to AD3

Explanation:

The Long Run Aggregate Supply Curve represents the supply in the Economy when the Economy is at full employment. Operating at this level would be most ideal for an economy.

The point where AD and AS intersect is the quantity produced in the short run. Government policy should therefore be geared at an equilibrium level where Aggregate Demand = Aggregate Supply = Long Run Aggregate Supply because at this point, the Economy will also be at Full Employment in the Short Run which is ideal.

The Fed should therefore attempt to raise investment by enough to shift aggregate demand from AD1 to AD2 and then to AD3 because at AD3, the Aggregate Demand would intersect the AS at the Full Employment quantity which is ideal.