Check Your Understanding

1. Question

   Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output:

   1. The government sharply increases the minimum wage, raising the wages of many workers.

   2. Solar energy firms launch a major program of investment spending.

   3. Congress raises taxes and cuts spending.

   4. Severe weather destroys crops around the world.

2. Question

   Suppose a rise in productivity increases potential output and creates a recessionary gap. Explain how the economy can self-correct in the long run.