Question

Consider the figure to the right. In the absence of a change in aggregate demand. what effect does negative economic growth have on the price level over time, other things being equal? Why? 1.) Using the line drawing tool, draw a new long-run aggregate supply curvo that shows the effects of negative economic growth on the economy's long-run equilibrium. Label your line 'LRAS . 2​. 2.) Using the point drawing tool, indicate the economy's now long-run equilibrium price and level of real GDP. Label this point ' E2​.' Carefully follow the instructions above, and only draw the required objects. The change in the price level over time due to negative economic growth and the subsoquent shift in lona-run aggregate supply is known as The figure to the right shows an economy in an inital long-run equilibrium at point A. a. Using the line drawing tool, show how, if at all, the equilibrium real GDP and the long-run equilibrium price level are affected by a reduction in the quantity of money in circulation. Properly label this line. Carefully follow the instructions above, and only draw the required objects. b. According to your graph, the equilibrium price level while the equilibrium real GDP

Answer 1

The change in the price level over time due to negative economic growth and the subsequent shift in long-run aggregate supply is known as Demand side inflation.

From the graph below, economic expansion is expected to result in a forward shift of the long-run aggregate supply curve and reflects an increase in the economy's productive capacity. This growth means that the production possibilities curve (PPC) will expand outward and leads to higher long-run output levels.

As a result, the long-run aggregate supply curve will shift to Lras2.

Consequently, with the given aggregate demand, the aggregate supply curve will intersect the aggregate demand curve at a reduced price level (denoted as P2) and establishes a new equilibrium level labeled as E2.

Note: The full question with graph is attached below.