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In the country of Eastland the level of potential output is $800 billion. The short-run aggregate...

In the country of Eastland the level of potential output is $800 billion. The short-run aggregate supply curve is given by SRAS. The economy is currently in short-run equilibrium where the price level is 5.

Part 1: Use the infinite line tool to draw the long-run aggregate supply curve and label it LRAS.

Part 2: Show that at the current macroeconomic equilibrium there is an inflationary gap of $200 billion. Use the infinite line tool to draw an aggregate demand curve with a slope of -0.05 that passes through the price levels: P = 1 and 7. Label the curve AD1.

Part 3: Use the copy tool to shift the aggregate demand curve so that the inflationary gap is eliminated. Label the new aggregate demand curve AD2.
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