Policy Impacts on AD and AS Curves

Steps:

• Reducing labor costs decreases production expenses, shifting short-run aggregate supply (SRAS) rightward to increase output at lower price levels.
• Low interest rates encourage borrowing for investment and consumption, shifting aggregate demand (AD) rightward to boost spending.
• Combined effects raise equilibrium output and stabilize or lower price levels post-recession.
• Diagram shows both AD and SRAS shifting right from initial positions.

Why A is correct:

• A illustrates rightward shifts in both AD and SRAS, aligning with the cost-reducing and demand-stimulating effects of the policies per the AD-AS model.

Why the others are wrong:

• B shows only AD shifting right, ignoring labor cost impact on supply.
• C shows only SRAS shifting right, omitting interest rate effects on demand.
• D depicts leftward shifts, contradicting expansionary policy intentions.

Final answer: A