Question

If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/ AS diagram?

Short answer

Cleaner technology will lead to increase in price level and decrease in output level.

Step-by-step solution

Aggregate demand :

The entire quantity of products and services sought by customers at a particular price level and period is known as aggregate demand.

Impact on output, price level and employment due to use of cleaner technology : 

The new administration wants to use cleaner technology that is less efficient, this implies that the current technology is less efficient than the technology that was previously used. Overall productive capacity will be lowered as a result of new technology adoption. This has a negative impact on the economy since it reduces employment. It causes the AS curve to move to the left, resulting in higher prices and lower output.