a. Define capital stock. Use the aggregate demand and supply to show the effects of a decrease in interest rates in the short-run and in the long-run. Explain why each curve shifts. Also explain why an increase in consumer spending would not have the same effect in the long-run.
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Equilibrium is the price -quantity pair where the quantity demanded is equal to the quantity supplied.
In the long-run, increases in aggregate demand cause the output and price of a good or service to increase.
In the long-run, the aggregate supply is affected only by capital, labor, and technology.
The aggregate supply determines the extent to which the aggregate demand increases the output and prices of a good or service.
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