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Chapter 24: Q 32. (page 602)

How is long-term growth illustrated in an AD/AS model?

Short Answer

Expert verified

This is illustrated below:

Step by step solution

01

Step 1. Introduction

The long-term growth of the economy in the AD/AS model is depicted by a shift towards the right on the AS curve. Surprisingly the potential GDP line shifts towards the right over a period of time that is vertical, as given in the graph below:

02

Step 2. Explanation

In the above graph. The potential GDP shifts in the long run (LR) from LRAS0 to LRAS1 to LRAS2 because equilibrium price shifts from E0 to E1 to E2 towards the right, corresponding to the price and real GDP.

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Most popular questions from this chapter

The imaginary country of Harris Island has the

aggregate supply and aggregate demand curves as Table 24.3shows.

a. Plot the AD/AS diagram. Identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this

economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275at every price level.

Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original

output, price level, and employment?

In the AD/AS model, what prevents the economy from achieving equilibrium at the potential output?

How is cyclical unemployment illustrated in an AD/AS model?

What is potential GDP?

Does Say’s law apply more accurately in the long run or the short run? What about Keynes’ law?
See all solutions

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