Price Level Step 2: Changes in Short-Run Equilibrium The following graph shows an aggregate demand (AD) curve and a short-run aggregate supply (SRAS) curve for an economy. Suppose the economy is initially in a short-run equilibrium at PE, and Real GDP is 20billion. At some point, the economy experiences a decrease in the price of nonlabor inputs. Adjust the following graph to show the effect of a decrease in the price of nonlabor inputs on the economy. the AD can be moved down 1x or up 1x (if you move AD up or down, the dashed line moves as well) the SRAS can be moved down 1x or up 1x (?) AD SRAS AD 0 8 12 16 20 24 28 32 36 40 Real GDP (Billions Dollars) SRAS Which of the following best describes the effect of a decrease in the price of nonlabor inputs? O The price level falls below PE, but the Real GDP remains the same. The price level remains the same, but the Real GDP decreases to $24 billion. O The price level rises above PE, and the Real GDP decreases to $24 billion. O The price level falls below Pg, and the Real GDP increases to $24 billion. Suppose the economy experiences a fall in the interest rate. Adjust the graph to show the effect of a fall in the interest rate on the economy. Which of the following best describes the effect of a fall in the interest rate? O The price level falls even further below Pg, and Real GDP decreases from $24 billion to $28 billion. O The price level rises back to Pg and Real GDP increases from $24 billion to $28 billion. O The price level falls but remains above Pg and Real GDP decreases further from $24 billion to $28 billion. O The price level rises even higher above Pg, and Real GDP increases from $24 billion to $28 billion. Step 1: Short-Run Equilibrium The following graph shows an aggregate demand (AD) curve and a short-run aggregate supply (SRAS) curve for an economy. Suppose that the economy is initially in a short-run equilibrium: at Pg, and Real GDP is 20 billion. Suppose that at some point, the price decreases to P. PRICE LEVEL AD SRAS 0 4 8 12 16 20 24 28 32 36 40 REAL GDP (Billion Dollars) a shortage or a surplus At P*, there is of $ output, and consumers decrease or do not change or increase billion goods. As a result, the price level consumption. decrease or do not change or increase falls or remains the same or rises firms