Shifts in Aggregate Demand in the A1

Shifts in Aggregate Demand in the A1 - This is represented...

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Shifts in Aggregate Demand in the AS-AD Model Now say that the Fed pursues expansionary monetary policy. In this case, the aggregate demand curve shifts to the right from aggregate demand curve 1 to aggregate demand curve 2. The intersection of short- run aggregate supply curve 1 and aggregate demand curve 2 has now shifted to the upper right from point A to point B. At point B, both output and the price level have increased. This is the new short-run equilibrium. 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.
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Unformatted text preview: 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. Figure %: Graph of a contractionary shift in the AS- AD model 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 that we begin again at point A where short-run aggregate supply curve 1 meets the long-run aggregate supply curve and aggregate demand curve 1. We are in long-run equilibrium to begin....
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