Question

Graph an Increase in AD showing Equilibrium in the intermediate range Graph an Increase in AD showing Equilibrium in the vertical range Phase of Bus. Cycle: What happens to Unemp? What happens to GDP? What happens to price level? Phase of Bus. Cycle: What happened to Unemp.? What happens to GDP? What happens to price level?

Answer 1

(1)

In following graph, AD0 and SRAS0 are initial AD and AS curves (with upward rising SRAS at intermediate range), intersecting at point A with initial price level P0 and real GDP Y0.

When aggregate demand increases (in expansion phase of business cycle), AD0 shifts right to AD1, intersecting SRAS0 at point B with higher price level P1 and higher real GDP Y1. Unemployment decreases.

SRASO A ADI ADo y Yo

(2)

In following graph, AD0 and AS0 are initial AD and AS curves (with vertical AS at classical range), intersecting at point A with initial price level P0 and real GDP Y0.

When aggregate demand increases (in expansion phase of business cycle), AD0 shifts right to AD1, intersecting AS0 at point B with higher price level P1 but same real GDP Y0. Unemployment remains the same.

ASO API Po ADo Y Yo