1.3.2 From the following graph, identify the initial equilibrium, the short-run equilibrium, and the long-run equilibrium based on the scenarios below. Explain your answers and identify what happened to the price level and aggregate output.

Scenario 1. The economy is initially in long-run equilibrium at point A, and a cost shock causes cost-push inflation. The government reacts by implementing an expansionary fiscal policy.

Scenario 2. The economy is initially in long-run equilibrium at point A, and an increase in government purchases causes demand-pull inflation. In the long run, wages respond to the inflation.

Scenario 3. The economy is initially in long-run equilibrium at point C, and the federal government implements an increase in corporate taxes and personal income taxes. In the long run, firms and workers adjust to the new price level and costs adjust accordingly. Scenario 4. The economy is initially in long-run equilibrium at point C, and energy prices decrease significantly. The government reacts by implementing a contractionary fiscal policy.

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Price level, P P2 P Po 0 Yo D A Y AS (Long run) AS, (Short run) AS2 (Short run) Y2 Aggregate output (income), Y B AD AD