Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run. (10 points)
Following is diagram:
In above diagram, Supply curve AS1 shift to AS2 when supply shock hit economy in short run but over the long the long run, supply curve again moves or shifts to right thereby causing rise in real output level.
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