Suppose the economy is operating at both short-run and long-run equilibrium. a) Draw an initial graph...

Suppose the economy is operating at both short-run and long-run equilibrium. a) Draw an initial graph showcasing this information. Label the initial equilibrium (A).

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Expert Solution

An economy is both short run and long run equilibrium when short run aggregate supplu curve, long run aggregate supplu curve and aggregate demand curve intersects.
Short run aggregate supply curve is an positively sloping curve. Because quantity supplied increases as price increases and quantity supplied decreases as price decreases. In short run fir have one fixed factors of production.
Long run aggregate supply curve is vertical straight line.
Because in long run, the potential output that an economy can produce does not related to price level. The amount of output produced by a firm can fully able to adjust with prices in long run
Aggregate demand curve is negatively sloping curve. Quantity demanded rises as price decreases and quantity demanded falls as price increases. It is negatively sloped due to real balance effect, intetest rate effect and foreign trade effect.
Let us plot output on horizontal axis and price on vertical axis. Economy is equilibrium at point A where LRAS, SRAS and AD curve intersectd and thus determines P* level of price and Y * level of output.

Rahul Sunny answered 1 year ago

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