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).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Note: The hand written solution is not allowed.

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).

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