Question

The aggregate demand aggregate supply mode is quite useful tool for us to understand the economy. So far, we saw only one change at a time, however, in reality, there can be multiple shocks at the same time.

The economy was in long run equilibrium. Assuming all else equal, world scientists collaborated to invent a vaccine for everyone to be safe from deadly virus, raising productivity. This makes consumers and businesses optimist about the economy. At the same time, commodity market, namely oil market is calm, maintaining a stable supply.

Given above scenario, what do you think will happen to the LRAS, SRAS and AD curves in each in short run? And what would happen to price level and output in the economy?

What about in long run?

Answer 1

Answer - In the short run, only SRAS and AD curve will shift. As business and consumers both are optimistic , SRAS and AD curve both will shift right leading to creation positive output gap in the economy. The price level here will be indeterminate. But , in the Long run , as the vaccine arrives , the prodictivity of labor force will increase. This rise in prodictivity will shift the LRAS curve to right thus increasing the potential of economy and bringing the economy again to long run equilibrium.