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Describe how price level evolves over time
Using the time series we can study how price level evolves over time. If all prices rose by 2% during one month, price level would rise by exactly 2%. If one of the prices rose by 2% when other prices remained unchanged, price level would rise though by much less than 2%. Exactly how much it would rise would rely on the weight of changed price.
Suppose the potential level of real domestic output (Q) for a hypothetical economy is $160 and the price level (P) initially is 200. Use the following short-run aggregate supply
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