Refer to the figure given below. In the above figure, AD₁ and AS₁ represent the original aggregate demand and aggregate supply curves, respectively.AD₂ and AS₂ show the new aggregate demand and aggregate supply curves.At the original equilibrium price and quantity, this economy is experiencing: A)inflation. B)economic growth. C)full employment. D)less than full-capacity output.

Question

Quizplus · Accepted Answer

The original equilibrium price and quantity occurs at point E on the graph. The new equilibrium price and quantity occurs at point E'. The increase in aggregate demand shifts the AD curve to the right, causing an increase in price level and output. However, the increase in aggregate supply also shifts the AS curve to the right, causing a decrease in price level and an increase in output. The net effect is an increase in output (Q') but no change in price level (P'). Since the economy is operating at a level below full capacity output, it is experiencing less than full-capacity output, not inflation, economic growth, or full employment.

Refer to the Figure Given Below