Apila Homework: Aggregate Supply4. Short-run equilibrium and long-run aggregate supply
The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves are labeled a,b,c, and d. Three points on the graph are also indicated by grey stars and labeled K, L, and M.
Identify which curve on the previous graph corresponds to each of the following descriptions. If the curve described is not shown on the graph, choose Not Shown. In the descriptions, AD represents aggregate demand; SRAS represents short-run aggregate supply; LRAS represents long-run aggregate supply.
Description
a
b
c
d
Not Shown
SRAS if the expected price level is 70
LRAS
AD
SRAS if the expected price level is 60
SRAS if the expected price level is 50
Suppose the economy is currently in short-run equilibrium at point L. In this case, the economy is producing at an output level q, its potential output. At current prices and wage levels, real wages are q, what firms and workers expected when they agreed on wage contracts. In the long run, if the price level and the nominal wage are both flexible, wages will q, , which will cause the q, curve to shift to theq, Assuming the other two curves do not change, the economy will reach a new equilibrium at an output of q, and a price level ofq,
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