Exhibit 14A-1 Aggregate demand and supply model

Beginning in Exhibit 14A-1 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂ . The economy's path to a new long-run equilibrium is represented by a movement from:

Question

Exhibit 14A-1 Aggregate demand and supply model

Beginning in Exhibit 14A-1 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂ . The economy's path to a new long-run equilibrium is represented by a movement from:

Quizplus · Accepted Answer

Starting from the long-run equilibrium point E₁, an increase in aggregate demand shifts the AD curve to AD₂. This causes an increase in both price level and output in the short run, represented by a movement from point E₁ to point E₂ along the SRAS curve. However, this level of output is above the potential output, which leads to an increase in resource prices and a leftward shift of the SRAS curve to SRA₃. The economy reaches a new long-run equilibrium at the intersection of SRA₃ and the initial AD curve at point E₂, which is a movement from point E₂ to point E₃ and then back to point E₂. Therefore, the correct choice is D.

Exhibit 14A-1 Aggregate Demand and Supply Model