Question

The graphs illustrate an initial equilibrium for some economy. Suppose that the economy experiences a rise in aggregate demand. Use the graphs to illustrate the new positions of AD, SRAS, and LRAS as well as the new short‑run and long‑run equilibria resulting from this change.

Answer 1

*see image*

Step-by-step explanation:

For the long-run graph, the aggregate demand increase looks the same as on the short‑run graph. The SRAS curve, however, shifts such that it intersects the aggregate demand curve and LRAS curve at the same point.

As was the case in the short run, the LRAS curve itself does not move. The equilibrium points are the intersection of aggregate demand, SRAS, and LRAS. If these three do not intersect at the same point, then the graph does not represent the long run.

Basically: In the short run, increase in aggregate demand will shift AD curve rightward to AD1, intersecting SRAS at point A with price level P1 and real GDP Y1. In the long run, higher price level raises cost of inputs and firms lower production and output, decreasing aggregate supply. SRAS shifts left to SRAS1, intersecting AD1 at point B with price level P2 and real GDP Y0.