Urgent: The graph below shows the aggregate demand (AD) and short-run aggregate supply (SRAS) curves for an e

Question

The graph below shows the aggregate demand (AD) and short-run aggregate supply (SRAS) curves for an economy. Assume that the economy is initially in short-run and long-run equilibrium at $6 trillion. That is, the economy's natural rate of output is $6 trillion per year.

8.2. What is the LONG-RUN effect of an increase in government spending at full employment? First, shift one of the curves to show the short-run response to the increased government spending. Then, shift one of the curves to show the long-run response to higher government spending.

I really got confused.Can anyone help me out by explaining to me? Thanks

Answer 1

Where is the graph? The effect of an increase in govt. spending at full employment level is to raise the price level - ie. cause inflation through increase in aggregate demand beyond the Full employment supply level. In the shortrun govt expenditure increase shifts the aggregate demand curve upwards to the left, resulting in an excess demand at full emplyment output level. As the prices increase additional capacity and additional imports will shift the aggregate supply curve to the right.

The source of your confusion is not clear in the absence of the graph you are referring to in the question.