Suppose a reduction in the supply of oil has caused the short-run aggregate supp

Question

Suppose a reduction in the supply of oil has caused the short-run aggregate supply curve to shift leftward to SRAS, as shown in the graph at right. The economy is currently in short-run equilibrium at point E1, and the reduction in supply is expected to be permanent. LRAS SRAS1 1.) Using the line drawing and/or 3-point curved line drawing tool, show the adjustment to long-run equilbrium in this situation. Properly label your new curve(s). 2.) Using the point drawing tool, identify the new long-run equilibrium point and label the point E2 Carefully follow the instructions above, and only draw the required objects. SRAS AD Real GDP per year (S trillions)

Explanation / Answer

Shift the aggregate demand curve to the right

An increase in aggregate demand will shift the demand curve to the right and real GDP increases to full employment potential output.

New Keynesian economist advocate expansionary fiscal policy as a policy making

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