a) Draw the AD-AS diagram of an economy in long-run equilibrium. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply. b) Suppose the economy next goes into the state of stagflation, i.e. the combination of high inflation and low output. Suppose further that this happened as a result of one curve shown above having shifted. Which one curve has shifted? Explain with the help of AD- AS diagram why this one curve must have shifted when economy goes into stagflation. c) Suppose the government takes no action about the stagflation, describe with explanation how the economy will move back to its long-run equilibrium (you may refer to the diagram in Part b) in your explanation).

a) Draw the AD-AS diagram of an economy in long-run equilibrium. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply. b) Suppose the economy next goes into the state of stagflation, i.e. the combination of high inflation and low output. Suppose further that this happened as a result of one curve shown above having shifted. Which one curve has shifted? Explain with the help of AD- AS diagram why this one curve must have shifted when economy goes into stagflation. c) Suppose the government takes no action about the stagflation, describe with explanation how the economy will move back to its long-run equilibrium (you may refer to the diagram in Part b) in your explanation).

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 1P

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