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1. The figure above shows the initial aggregate demand curve, AD0, the initial short-run aggregate supply curve, SAS0, and the long-run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, the government increases its expenditure on goods and services. Draw the new aggregate demand and short-run aggregate supply curves in the figure to show the effects of this event on Atlantia's real GDP and price level.
a. What happens to Atlantia's potential GDP?
b. In the short run, what happens to aggregate supply and aggregate demand?
c. What are the new short-run equilibrium real GDP and price level?
d. In the long run, what happens to the short-run aggregate supply and aggregate demand?
e. What are the new long-run equilibrium real GDP and price level?
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