Question

The aggregate-demand (AD), short-run aggregate supply (AS), and long-run aggregate-supply (AS_LR) schedules for a given economy are as follows. The schedules show the GDP price index (P) versus real GDP (Q), with Q measured in trillions of constant (real) dollars. Note that AS_LR is potential output (Q_f).

P	AD	AS	ASLR
60	7	1	3
90	6	2	3
120	5	3	3
140	4	4	3
160	3	5	3
170	2	6	3

1. Graph the AD, AS, and AS_LR curves. Be sure to label the curves and the axes.

2. Explain the difference in shape between the AS and AS_LR curves.

3. State the conditions for short-run equilibrium and for long-run equilibrium.

4. What is the equilibrium price level for this economy in the short run? What is Q for this economy in the short run? Show the short-run equilibrium price and short-run equilibrium output on the graph. Explain the process to equilibrium.

5. What is long-run equilibrium GDP for this economy? What is long-run equilibrium P for this economy? Explain the process to equilibrium.

Answer 1