Question

How do I draw an AD-AS curve when there is a contraction in demand side factors?

How do I draw an AD-AS curve when there is a contraction in demand side factors?

Homework Answers

Answer #1

Contraction in demand due to lower consumption in a Contractionary monetary policy leads to AD curve shift leftwards and reaches new equilibrium point E1 from E0 earlier where the Longrun aggregate supply curve intersects and this causes the prices and aggregate output to decline in short run. However in long run the economy self adjusts itself back to E0 or initial equilibrium point.

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