QUESTION

# The aggregate-demand (AD), short-run aggregate supply (AS), and long-run aggregate-supply (AS LR ) schedules for a given economy are as follows.

The aggregate-demand (AD), short-run aggregate supply (AS), and long-run aggregate-supply (ASLR) schedules for a given economy are as follows. The schedules show the GDP price deflator (P) versus real GDP (Q), with Q measured in trillions of constant dollars.

1. Graph the AD, AS, and ASLR curves. Be sure to label the curves and the axes.

Hint: ASLR is at potential output (Qf).

2. Explain the difference in shape between the AS and ASLR curves in general.

Hint: "in general" means not just for this economy but for any economy.

3. State the general conditions for short-run equilibrium and for long-run equilibrium. Which one implies the other?

Hint: "general" means not just for this economy but for any economy.

4. What is the equilibrium price level for this economy in the short run? What is Q for this economy in the short run? Show the short-run equilibrium price and short-run equilibrium output on the graph. Suppose that P is initially at 150. This implies that there is either excess demand or excess supply—which one? And what is its amount? Then explain the process of eliminating the excess demand or supply, that is, the process to reach short-run equilibrium.

5. What is long-run equilibrium GDP (Q) for this economy? Assuming that the AD curve does not shift, what is the long-run equilibrium price level (P) for this economy? Beginning at short‑run equilibrium for this economy, explain the process to long-run equilibrium.