After the sudden increase in the desired investment expenditures, which of the alternative aggregate demand curves - AD2 or AD3 will apply. Other things being equal, what will happen to the equilibrium price level and the equilibrium real GDP in the short run. Other things being equal, after the event and adjustments discussed in part (a) what will happen to the equilibrium price level and the equilibrium real GDP in the long run. Concept introduction: New Keynesian Sticky Price Theory- New Keynesian theory of price stickiness is basically a counter of new classical theory’s assumption that prices and wages are flexible, helps in clearing the market by automatic adjustment. New Keynesian theory says that the prices are sticky and do not change in the short run. It is not economically feasible as well as politically practical to change price and wages in the short run. Aggregate Demand − It is the total demand for goods and services in the country. It consists of all the sources of demand in the economy that includes consumption, investment and government expenditure. Aggregate Supply - Total supply of goods and services that producers are willing to supply in the economy.

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Chapter 17, Problem 11P

To determine

After the sudden increase in the desired investment expenditures, which of the alternative aggregate demand curves - AD2 or AD3 will apply. Other things being equal, what will happen to the equilibrium price level and the equilibrium real GDP in the short run.

Other things being equal, after the event and adjustments discussed in part (a) what will happen to the equilibrium price level and the equilibrium real GDP in the long run.

Concept introduction:

New Keynesian Sticky Price Theory- New Keynesian theory of price stickiness is basically a counter of new classical theory’s assumption that prices and wages are flexible, helps in clearing the market by automatic adjustment. New Keynesian theory says that the prices are sticky and do not change in the short run. It is not economically feasible as well as politically practical to change price and wages in the short run.

Aggregate Demand − It is the total demand for goods and services in the country. It consists of all the sources of demand in the economy that includes consumption, investment and government expenditure.

Aggregate Supply- Total supply of goods and services that producers are willing to supply in the economy.

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