Suppose an economy initially operates at the natural rate of production (full employment production). Use the AD-AS model to graphically illustrate the effects on price and output of an increase in government spending and a decrease in the cash rate. Explain your assumptions regarding the aggregate supply range of your analysis.

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In the ADAS Aggregate DemandAggregate Supply model the economy initially operates at the natural rate of production which corresponds to the intersection of the longrun aggregate supply LRAS curve and ... View the full answer