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.