An economy is in a deep recession, operating at equilibrium E1 E_1\,E1 with an actual output of Y1 Y_1\,Y1 and price level P1P_1P1, as shown in the diagram below:
The government implements a series of market-based supply-side policies designed to increase productive capacity, shifting the long-run aggregate supply curve from LRAS1 LRAS_1\,LRAS1 to LRAS2LRAS_2LRAS2.
Assuming aggregate demand (ADADAD) remains unchanged, what is the short-run impact of these supply-side policies on actual real output and the price level?
Both actual real output and the price level will remain unchanged at Y1Y_1Y1 and P1P_1P1
Actual real output will increase to Yf2Y_{f2}Yf2 and the price level will remain at P1P_1P1
Actual real output will remain at Y1Y_1Y1 and the price level will fall below P1P_1P1
Actual real output will increase to Yf1Y_{f1}Yf1 and the price level will fall below P1P_1P1
