Question

The accompanying graph illustrates an economy in long-run equilibrium which is denoted by point ELR.

Suppose a new technology is discovered which increases productivity. In the graph, demonstrate how the economy moves to its new long-run equilibrium by shifting the appropriate curves and placing point ELR at the new long-run equilibrium.

In the long run, the aggregate price level ______________ and real GDP (aggregate output) ______________.

WORD BANK
increases
decreases
does not change

Answer 1

*see image*

Step-by-step explanation:

When there is a change in the potential for an economy to produce goods, this will change long-run aggregate supply (LRAS). In this case, there is an increase in productivity. This increase in productivity leads to an increase in LRAS. The LRAS curve shifts out. Firms will respond either with new entry or increasing each firm's short run supply. As a result, the short run aggregate supply (SRAS) curve increases until it crosses LRAS at the same point as aggregate demand (AD) crosses LRAS.

Because there is an improvement in technology that has raised factor productivity, nation can produce more with same resources so LRAS and SRAS shift to the right.

In the long run, the aggregate price level decreases, and real GDP increases.