Take a picture of your short run equilibrium of the current economy and upload it. Include...

Take a picture of your short run equilibrium of the current economy and upload it. Include a caption to your image that explains the following.

Does the image represent an economy in a recession, expansion, or equilibrium?

If your short run equilibrium is not at the long run equilibrium, provide a forecast of how the economy will have to return to equilibrium. Recall, we are not discussing any government intervention yet. So your adjustment will have to be due adjustment in prices.

Solutions

Expert Solution

AD-AS Model -----

Keynesian AD-AS model represents the intersection of AD and AS curve which determines the equilibrium level of output / income / employment at equilibrium price level.

Short and long run equilibrium------

It occurs when AD curve,short run AS curve ( SRAS) and long run AS ( LRAS) curve intersect at one point.

see the graph------

Here at point E potential gdp is equal to real gdp

AD curve shifts rightward and equilibrium point is now E' which increases the real gdp from y to y'

Short Run demand shock and Self adjusting mechanism in the long run

As the positive AD shock bring about a rise in price level ( inflation) which results in the decrease in real wages. It leads to high wage demand by workers which tends to increase labour cost and it causes SRAS curve to decrease

The graph shows the leftward shift of SRAS curve to SRAS' and intersects with AD and LRAS at point E2,thus finally real gdp equals the potential gdp.

Rahul Sunny answered 1 year ago

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