Draw an aggregate supply and aggregate demand graph which shows the economy producing an output which exceeds potential output in the short run, and the adjustment that will occur as the economy adjusts to long-run equilibrium
What will be an ideal response?
In the short run, the economy is at the intersection of AD and AS0, with an output of y0. In the long run, aggregate supply will decrease, shifting up from AS0 to AS1, and the equilibrium output will fall from y0 to yp, at the intersection of AD, AS1, and Long-run AS.
Economics
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