Question

LRAS In the graph to the right illustrating the AD-AS model, assume the economy was in equilibrium at point E1. Then, assume there was a decline in spending on new houses. Where does short-run equilibrium occur? Where does long-run equilibrium occur? 1.) Using the point drawing tool, plot the point that represents short-run equilibrium. Label this point E2. Price level, P. SRAS a SRAS2E1 2.) Using the point drawing tool, plot the point that represents long-run equilibrium. Label this point E3. Carefully follow the instructions above, and only draw the required objects. AD2 AD1 Aggregate output, Y

Answer 1

Short run change is shown by leftward shift of AD curve from AD1 to AD2. The new equilibrium is E2 with lower price level and lower GDP

Long run change is shown by rightward shift of SRAS curve from SRAS1 to SRAS2. The new equilibrium is E3 with lower price level and same or unchanged GDP

LRAS SRAS1 Price level, P SRAS2 Ε2Ο AD2 AD1 Aggregate output, Y