Assume that the economy is operating at full employment (long-run equilibrium). Use our AD and AS...

Assume that the economy is operating at full employment (long-run equilibrium). Use our AD and AS analysis to answer the following questions.

Graphically show the current economic state with an AD curve, a (short-run) AS curve and a long-run AS curve. Compare current GDP and potential GDP.

Expert Solution

Rahul Sunny answered 6 months ago

Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run...

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Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is a positive demand shock. a. Describe the short-run effects of this positive demand shock on output, unemployment, and prices. b. Describe how the economy will automatically move back to the potential level of output in the long run. c. Illustrate your answers in point (a) and (b) using an AD-AS graph. Show the short-run effects and the long-run adjustments.

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