Question

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left....

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.

I meant to put this question instead of the one I posted.
What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

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Answer #1

The SRAS curve shows a positive relationship between price level and real GDP. On it's far left, the nearly horizontal shape of the SRAS curve shows a stable price level. As at this level, the level of real GDP is far below the full employment output level, or also known as potential GDP level, therefore if equilibrium occurs at the flat range of SRAs, then actual GDP will be far below the potential GDP level. Therefore, the economy will be experiencing high level of unemployment but price level will be stable, so that there will be no inflation in this situation.

The horizontal axis of the AD/AS diagram measures real GDP and the vertical axis measures price level.

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