Question

The following figure depicts the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS) curves for an economy. The economy is initially at long-run equilibrium, at point A. Suppose that there is an increase in the amount of investment in the economy due to a reduction in the real interest rate. This increase in investment shifts the AD curve to the right, depicted below in the movement of the economy from point A to point B. Now, suppose that there is an unexpected increase in technological knowledge due to a breakthrough in artificial intelligence research. This change is initially reflected in a shift in the SRAS curve to the right, depicted below in the movement of the economy from point B to point C. In the figure below, shift the appropriate curve to depict how the economy reacts in the long run, when all prices are flexible.

Answer 1

LRAS curve will shift to the right as the economy's productivity increases after an improvement in technology. LRAS1 shifts to LRAS2.