Suppose another breakthrough in computer technology greatly increases total factor productivity. Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.
What will be an ideal response?
The increase in total factor productivity would increase long-run and short-run aggregate supply. If the LRAS and SRAS curves both shifted to the right by about the same amount, but the AD curve did not shift initially, then in the short run output would increase somewhat and the price level would decline. But the economy would not be in long-run equilibrium yet. To achieve long-run equilibrium the SRAS curve would need to shift further to the right as costs of production decline further, thus increasing output and reducing the price level.
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