Homework Answers
In the short run AD1 shifts to
AD2 (lower money supply) and new price level = 93.7 is attained,
output is lowered. (intersection of AD2 and SRAS1)
In the long run SRAS1 shifts to SRAS2 (lower production costs as labour wages get adjusted to new price expectations), price level is further lowered and output increases again to LRAS output level.
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