The Figure Above Shows the Initial Aggregate Demand Curve, AD₀

question 362

Essay

The figure above shows the initial aggregate demand curve, AD₀, the initial short- run aggregate supply curve, SAS₀, and the long- run aggregate supply curve, LAS. The points in the figure show possible combinations of real GDP and the price level at which the economy of Atlantia is in macroeconomic equilibrium. The economy is initially at point A. Then, Atlantia's oil producers form a price- fixing organization and increase the price of oil. Suppose that potential GDP does not change and that Atlantia's Central Bank takes no action. Draw the new
aggregate demand and short- run aggregate supply curves in the figure to show the effects of this event on Atlan real GDP and price level.
a) What happens to aggregate supply and aggregate demand?
b) What are the new equilibrium real GDP and price level?
c) Will the rise in the price of oil lead to inflation in Atlantia? Why or why not?

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