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Assignment:
Assume an economy begins in long run equilibrium with output equal to its natural or potential level (the level associated with Long Run Aggregate Supply). Next assume there is an increase in Aggregate Demand. What is the effect on equilibrium output and price level in the short run? Trace and explain the sequence of steps by which the economy returns to its long run equilibrium. What happens to the equilibrium output and price level at each step? Now do the same analysis for a decrease in Aggregate Demand, assuming again that the economy begins with output on the Long Run Aggregate Supply Curve. What are some examples of what could cause the economic disturbances that shift Aggregate Demand? What are some examples of economic disturbances that could shift Aggregate Supply? Is there anything that can affect the position of the Long Run Aggregate Supply Curve?
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