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20. Describe and show what happens to aggregate equilibrium when SAS changes (both increase and decrease;...

20. Describe and show what happens to aggregate equilibrium when SAS changes (both increase and decrease; be sure to give at least one reason for the shift).

21. Describe and show long run aggregate equilibrium. Identify a recessionary gap and an inflationary gap and reasons why the economy is in them. Describe and show how each gap is eliminated on both the AD side and the SAS side. .

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Answer #1

Aggregate equilibrium is determined when AD and AS curve intersect each other at a particular point.

If short run aggregate supply (SAS) changes, it can impact price level and output in the economy.

If there is an increase in short-run aggregate supply, AS curve will shift rightwards. This will increase the output but will decrease the price in an economy. Increase in short-run aggregate supply can be due to rise in subsdies or fall in tax rates.

If there is an decrease in short-run aggregate supply, AS curve will shift leftwards. This will increase the price but will decrease the output in an economy. Decrease in short-run aggregate supply can be due to rise in inputs and cost of production or increase in the tax rates.

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