Using graphs and explanation, show the 3 states of the economy in the short run as...

Using graphs and explanation, show the 3 states of the economy in the short run as compared to the natural rate of GDP.

Expert Solution

There are three cases in the short run pertaining to the goods market equilibrium

a) GDP at the short run equilibrium matches with the GDP at the long run equilibrium. This happens when the AD and the SRAS intersect each other at LRAS. This gives a short run equilibrium real GDP equal to long run equilibrium GDP

b) GDP at the short run equilibrium is less than the GDP at the long run equilibrium. This happens when there is a recessionary gap and AD and the SRAS intersect each other to the left of the LRAS. This gives a short run equilibrium real GDP which is less than the long run equilibrium GDP

c) GDP at the short run equilibrium is more than the GDP at the long run equilibrium. This happens when there is an inflationary gap and AD and the SRAS intersect each other to the right of the LRAS. This gives a short run equilibrium real GDP which is greater than the long run equilibrium GDP

Rahul Sunny answered 5 months ago

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