In the AS/AD model how do we see economic growth? Explain and show graphically

Expert Solution

In an AD/AS diagram, long-run economic growth due to productivity increases over time is represented by a gradual rightward shift of aggregate supply. The vertical line representing potential GDP—the full-employment level of gross domestic product—gradually shifts to the right over time as well. You can see this effect in AD/AS diagram below, which shows a pattern of economic growth over three years.

Shifts in Aggregate Supply (a) The rise in productivity causes the AS curve to shift to the right. The original equilibrium E0 is at the intersection of AD and AS0. When AS shifts right, then the new equilibrium E1 is at the intersection of AD and AS1, and then yet another equilibrium, E2, is at the intersection of AD and AS2. Shifts in AS to the right, lead to a greater level of output and to downward pressure on the price level.

Rahul Sunny answered 2 years ago

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