In the below diagram assume that the aggregate demand curve shifts from AD1 in year 1 to AD2 in year 2, only to fall back to AD1 in year 3. (a) Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.(b) Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position, Pb and GDPb for the price level and real GDP respectively.(c) Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position, Pc and GDPc for the price level and real GDP respectively.

Question

In the below diagram assume that the aggregate demand curve shifts from AD1 in year 1 to AD2 in year 2, only to fall back to AD1 in year 3.  (a) Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.(b) Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position, Pb and GDPb for the price level and real GDP respectively.(c) Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position, Pc and GDPc for the price level and real GDP respectively.

Quizplus · Accepted Answer

The Answer is (a) Equilibrium price and quantity will rise from Pb to Pc and GDPb to GDP2.

In the Below Diagram Assume That the Aggregate Demand Curve