1. A dynamic AD-AS model is based on the fact that Long Run Aggregate Supply expands...

1. A dynamic AD-AS model is based on the fact that Long Run Aggregate Supply expands or contracts over time. So, if the Aggregate Demand does not keep up, or exceeds the expansion in supply, a recession or a boom occurs.

a.Draw AD-SRAS-LRAS diagram to show the economy in equilibrium.

b.Now assume that LRAS curve shifted to the right due to technological improvements, but Aggregate Demand did not kept the pace. Draw the new equilibrium.

c.What are the monetary policy instruments that could be employed to achieve equilibrium.

d. Draw the new equilibrium and show how it was achieved.e.What are the fiscal policy instruments that could be employed to achieve equilibrium.f.Draw the new equilibrium and show how it was achieved.

Solutions

Expert Solution

As demand curve shifts from AD to AD1 new equilibrium E3 is established at the equilibrium output level OQ

Rahul Sunny answered 2 weeks ago

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