Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean, and then thoroughly analyze each situation to answer the following questions.
Using aggregate demand, short-run aggregate supplies, and long-run aggregate supply curves, explain the process and causes by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another. Use the diagrams below, resizing them as necessary, to illustrate your analysis. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output?
a. There is a decrease in households' wealth due to a decline in the stock market.
b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases.