Self-Regulating Economy

Option A: Assume that the economy is currently in short-run equilibrium, then personal income taxes rise. Describe the correct sequence of events that happens as the economy adjusts to a new short-run equilibrium (be sure to mention which curve, AD or SRAS, shifts and which way it shifts and why).

Option B: If the economy is self-regulating, explain the correct sequence of events that occurs once the economy is in a recessionary gap to move the economy to long-run equilibrium (full employment).

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