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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 down 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 meets the long-run aggregate supply curve and aggregate demand curve 2. Thus, contractionary policy causes output and the price level to decrease in the short run, but only the price level to decrease in the long run. This is the logic that is applied to all shifts in aggregate demand. The long-run equilibrium is always dictated by the intersection of the vertical long-run aggregate...
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- Fall '11