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Now assume that for some reason Aggregate Demand shifts to the left (downwards) and suppose wages...

Now assume that for some reason Aggregate Demand shifts to the left (downwards) and suppose wages fully adjust. By using the AS-AD graph, show the effects of this shift on the equilibrium output and price level in the Short-Run and in the Long-run.

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Answer #1

Ans) SRAS is upward sloping because in short run wages and some other costs are sticky. So, increase in price level increases the quantity of aggregate supply.

A decrease in aggregate demand will shift AD curve to the left and both price level and output will decrease in short run.

In long run, aggregate supply is independent of price level and hence LRAS is vertical line. A decrease in aggregate demand will only lead to decrease in price level while output will remain same.

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