For each of the following, use an ADI LA diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. LO3,LO4, Los a. An increase in autonomous consumption. b. A reduction in taxes. c. An easing of monetary policy by the Bank of Canada (a downward shift in the monetary policy rule). d. A sharp drop in oil prices. e. A war that raises government purchases. Solution ADI (Aggregate Demand/inflation) curve represents the relationships between short-run equilibrium output Y and the rate of inflation. Whereas, IA (Inflation adjustment) curve is a horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions. The aggregate demand.

1. For each of the following, use an ADI LA diagram to show the short-run and long-run effects on
output and inflation. Assume the economy starts in long-run equilibrium. LO3,LO4, Los a. An
increase in autonomous consumption. b. A reduction in taxes. c. An easing of monetary policy
by the Bank of Canada (a downward shift in the monetary policy rule). d. A sharp drop in oil
prices. e. A war that raises government purchases.
Solution
ADI (Aggregate Demand/inflation) curve represents the relationships between short-run
equilibrium output Y and the rate of inflation. Whereas, IA (Inflation adjustment) curve is a
horizontal line showing the current rate of inflation, as determined by past expectations and
pricing decisions.
The aggregate demand