LRAS SRAS Problem Seven: Ad2 AD, Assume the economy is in long run equilibrium a

Question

LRAS SRAS Problem Seven: Ad2 AD, Assume the economy is in long run equilibrium at Point B. If planned investment decreases, where would the economy move in the short run? What would GDP growth, the unemployment rate, the CPI, the PPl, and capacity utilization be like? If no intervention happens, where would the economy be in long run equilibrium? Assume again that the economy is in long run equilibrium at Point B. Give three examples of changes (also known as shocks) that could shift the short term equilibrium to D. 1. 2. 3.

Explanation / Answer

Economy will move to E in short run

GDP GROWTH WILL fall, unemployment will increase, CPI WILL fall, ppi will rise, capacity utilisation will fall

Economy will be at C in long run

Peace after war, drastic fall in oil price, technological change that increase income of people

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