Question

Question 1: The following table to answer the following questions. 

 a. Sketch the aggregate supply(s) and aggregate demand diagram(s).

 b. What is the equilibrium output and price level?

 c. If aggregate demand shifts right, what is long-run equilibrium output?

 d. If aggregate demand shifts left, what is equilibrium long-run output?

 e. For an economy at long-run equilibrium, would you suggest using aggregate demand to alter the level of output or to control any inflationary increases in the price level? Why?

Answer 1

a) The AD curve shows the aggregate demand curve, the LAS curve is the Long run Aggregate Supply curve and the SAS curve is the Short Run Aggregate Supply curve. In the horizontal axis we take output whereas in the vertical axis we take price level of the economy.

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b) The equilibrium occurs at the intersection point of the aggregate demand and aggregate supply curves.

Thus in the Short Run,

Equilibrium Output = 3000

Equilibrium Price = 100

In the Long Run,

Equilibrium Output = 3000

Equilibrium Price = 100

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c) If the AD curve shifts to the right, equilibrium output remains the same as the LAS curve is fixed at 3000 but the equilibrium price level changes. The price level of the economy increases.

When AD curve shifts to the right, long run equilibrium output is 3000.

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d) If the AD curve shifts to the left, equilibrium output remains the same as the LAS curve is fixed at 3000 but the equilibrium price level changes. The price level of the economy decreases.

When AD curve shifts to the left, long run equilibrium output is 3000.

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e) For an economy which is at long run equilibrium I would suggest to control inflationary increase in the price level as the output is fixed at its potential level in the long run that is 3000 but there may be an increase in price.