Question

Velocity is 5

Money supply is 120

Current price level is 6

Full employment level of output is 100

Illustrate graphically the aggregate demand curve, the short run aggregate supply curve, and the long run aggregate supply curve.Illustrate graphically the aggregate demand curve, the short run aggregate supply curve, and the long run aggregate supply curve and what is the long run aggregate price level?

Answer 1

Money supply (M) x Velocity (V) = Price level (P) x Output (Y)

When economy is operating at full-employment level,

Long-run aggregate price level (P) = (M x V) / Y

= (120 x 5) / 100

= 6

Since Long-run aggregate price level = Current price level, Currently economy is in long run equilibrium. The aggregate demand (AD), long run aggregate supply (LRAS) and short run aggregate supply (SRAS) curves are depicted below, with long run equilibrium being at point A where AD, LRAS & SRAS intersect at real GDP (= Potential GDP) Y0 (= 100) and price level P0 (= 6).