AD-SRAS-LRAS model of the economy. Assume the SRAS curve is horizontal. (a) Assume the uncertainty associated with upcoming presidential and congressional elections is leading Myanmar consumers to be cautious and reduce their confidence about the future path of the economy. As a result, they save more and consume less. Use the AD-SRAS-LRAS diagram to discuss the predicted short-run and long-run impacts on the price level, real GDP and unemployment. (b) Discuss the policy options available to the Federal Reserve to address the fall in consumer confidence, and to fiscal policymakers, using an AD-SRAS-LRAS diagram to support your discussion.
【General guidance】The answer provided below has been developed in a clear step by step manner.Step1/2(a) In the AD-SRAS-LRAS model, a horizontal SRAS curve means that in the short run, changes in aggregate demand (AD) affect only the price level, not the output or employment. Therefore, the decrease in consumer confidence and increase in saving will shift the AD curve to the left. The shift in the AD curve will result in a lower equilibrium output (real GDP) and a lower price level. Since the SRAS curve is horizontal, the decrease in output will not result in any change in the level of unemployment in the short run.In the long run, the economy will adjust to the new equilibrium through changes in the price level, which will cause a shift in the SRAS curve. As people save more, the supply of loanable funds will increase, causing a fall in interest rates. The lower interest rates will stimulate investment and increase the supply of capital in the economy, which will increase the economy's productive capacity and shift the LRAS curve to the right. As a result, the new long-run equilibrium will have a lower price level and a higher output than before the shift in consumer confidence.ExplanationTherefore, the predicted short-run impact of the decrease in consumer confidence will be a lower output and price level, while the long-run impact will be a lower price level and a higher output.Explanation:Please refer to solution in this step.Step2/2(b) The Fed ... See the full answer