   Chapter 14, Problem 9QP

Chapter
Section
Textbook Problem

What is the difference in the long run between a one-shot increase in aggregate demand and a one-shot decrease in short-run aggregate supply?

To determine

Difference between long-run aggregate demand and short-run aggregate supply.

Explanation

In one shot, the increase in aggregate demand will lead to increase in the price of good. Due to the increase in demand, more workers are hired. Also, this will result in growth in economy.

Figure 1 shows the increase in aggregate demand.

Figure 1 shows that initially the economy is at point ‘a’. Suppose the aggregate demand is increased, the demand curve will shift from AD1 to AD2 to the right. Now, the economy moves to point ‘b’. In accordance with the increased demand, the price level will rise from P1 to P2. Then, the quantity will increase from Q1 to Q2, where the real GDP is greater than natural GDP. Therefore, the unemployment rate will reduce below the natural rate of unemployment in the economy...

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