Question

Based on the graphical representations below illustrating AD, SRAS, and LRAS curves, explain the dynamics and shifts associated for an economy experiencing:

(a) full employment
(b) an economic boom
(c) a recession

Answer 1

(a) Under full employment the AD and SRAS equilibrium will be at the long run equilibrium where prices and quantities are the equilibrium prices and quantities. This is given in diagram A below.

(b) In an economic boom the AD curve will shift rightwards and the SRAS curve shifts rightwards as well over time as the quantity increases. The prices will rise over time as the economy experiences inflation as AD rises. The economy will thus be beyond full employment. This is given by diagram B.

(c) In case of a recession the economy will be below the full employment equilibrium. This will mean that the AD curve will shift leftwards and so the AS curve will also shift leftwards over time. Initially the price level will fall and the quantity will fall as well. This is give by diagram C below.

LCA DATE: LRN 0 Ab fro 2