Chapter 7R, Problem 2FRQ

a)

To determine

The graph of aggregate supply and demand graph that shows an economy in a long-run equilibrium.

Explanation of Solution

The following graph of aggregate supply and demand shows an economy in long-run equilibrium:

  

This graph shows real output on the horizontal axis and price on the vertical axis.

1. The graph shows a price that is at equilibrium where demand and supply in the economy are equal. This point is labeled as PL.
2. The equilibrium quantity is on the horizontal axis which is labeled by Y.
3. A straight vertical line on the graph represents long-run aggregate supply which is labeled by LRAS where the economy is experiencing the supply in the long-run.

Economics Concept Introduction

Introduction: The long run is the time span in macroeconomics during which the overall price level, wage rates, and expectations fully conform to the status of the economy.

b)

To determine

The long-run equilibrium graph when the economy is experiencing economic growth.

Explanation of Solution

The graph will show the economic growth in long-run equilibrium as follows:

  

When there is an improvement in an economy's capacity to generate products and services over long-run, then the long-run aggregate supply curve would shift to the right. Such changes necessitate either an increase in the demand.

Economics Concept Introduction

Introduction: The long run is the time span in macroeconomics during which the overall price level, wage rates, and expectations fully conform to the status of the economy.