Economics Homework Help

Suppose that the economy is initially at the long run equilibrium with the equilibrium price level of P0 and the equilibrium GDP of Y0 and the initial aggregate demand, the initial short run aggregate supply, and the initial long run aggregate supply are AD0, SRAS0, and LRAS0 in a graph below.

1) Create a realistic or hypothetical scenario where there is an increase in AD.. Show a new aggregate demand as AD1, the new short run equilibrium GDP as Y1, and the new short run equilibrium price level as P1 in a graph below. Explain what will happen to the short run equilibrium price level and GDP in words and whether the economy is in an expansion or in a recession and why. (8 points)

2) Explain how the short run aggregate supply curve will shift in the long run and why in words. Denote the new short run aggregate supply curve as SRAS1 and show it in a graph below. Explain what will happen to the equilibrium GDP and price level in words and show them in a graph below. Denote a new price level as P2. (6 points)