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Unformatted text preview: But, as we move to the long run, the expected price level comes into line with the actual price level as firms, producers, and workers adjust their expectations. When this occurs, the short-run aggregate supply curve shifts along the aggregate demand curve until the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate demand curve all intersect. This is represented by point C and is the new equilibrium where short-run aggregate supply curve 2 equals the long-run aggregate supply curve and aggregate demand curve 2. Thus, expansionary policy causes output and the price level to increase in the short run, but only the price level to increase in the long run. The opposite case exists when the aggregate demand curve shifts left. For example, say the Fed pursues contractionary monetary policy. For this example, refer to . Notice say the Fed pursues contractionary monetary policy....
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- Fall '11