Question

</> EQ 25 Question 42 (13.5 points) The aggregate demand aggregate supply mode is quite useful tool for us to understand the economy. So far, we saw only one change at a time, however, in reality, there can be multiple shocks at the same time. The economy was in long run equilibrium. Assuming all else equal, world scientists collaborated to invent super vaccine for everyone to be safe from deadly viruses, raising productivity. This makes consumers and businesses optimist about the economy. At the same time, commodity market, namely oil market is calm, maintaining a stable supply. Given above scenario, what do you think will happen to the LRAS, SRAS and AD curves in each in short run? And what would happen to price level and output in the economy? What about in long run? Explain in words. Format BTU

Answer 1

In short run, there is news of invention of super vaccine which makes consumers as well as businesses optimist about the economy. It will raise consumption by consumers and raise investment by producers.

Aggregate demand = Consumption + Investment + Government spending + Exports - Imports

Rise in consumption and investment will raise aggregate demand in the economy. On the other hand, oil market is calm which does not affect supply curve. Rise in aggregate demand raise price levelf from P to P1 and output level from Y to Y1.

Pring AS po AD لا لا quentity

In long run, producers will produce more of the goods because of rise in demand in short run which shift supply curve to its right. It will reduce price to its initial level and raise output level further. It will shift long run aggregate supply to its right from LRAS to LRAS1.