There has been a recent $10 B decrease in the level of private business investment, l0 and you have been asked to advise the federal government on the following issue:
a. Using an AD-AS diagram of our economy initially at full-employment, explain the consequences for the economy of this shock. (i.e., Production, unemployment, inflation, and spending)
b. What would be the effect on the economy if the federal government raised taxes to fight this problem of the decreased investment shock? Is this the appropriate fiscal policy? Explain using your diagram what the effect of such a policy in terms of production, unemployment, inflation, and consumer spending.