An economy is initially in long-run equilibrium with the vertical LRAS Y* = 5,000,horizontal SRAS P = 100,and the AD equation P = 200 - 0.02Y.Then the AD shifts rightward to P = 220 - 0.02Y.The new long-run equilibrium price level will be

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In the long-run equilibrium, the output level is determined by the LRAS, which is Y* = 5,000. Substituting Y = 5,000 into the new AD equation P = 220 - 0.02Y gives P = 220 - 0.02(5,000) = 120.

An Economy Is Initially in Long-Run Equilibrium with the Vertical