Graphs of dad-das space

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Consider an economy that abides by a Dynamic AS/AD model as presented in class, which, in period t-1, is in a short equilibrium that happens to coincide with a long run equilibrium. In period t there is a negative supply shock. The shock remains for 3 periods (t, t+1,t+2), but then dissipates fully in period t+3. Describe how this economy reacts to this shock from periods t-1 through t+3. Also discuss how the economy might transition to a LR equilibrium. Graphs of DAD/DAS space and written discussion are required.

Reference no: EM131465081

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