The Figure Above Shows the Initial Aggregate Demand Curve, AD₀

question 100

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. Atlantia's Central Bank then increases the quantity of money year after year. Draw the nece curves in the figure to show the effects of this on Atlantia's real GDP and price level.
a) What happens to Atlantia's potential GDP?
b) In the short run, what happens to aggregate supply and aggregate demand?
c) What are the new short- run equilibrium real GDP and price level?
d) In the long run, what happens to aggregate supply and aggregate demand?
e) In the long run, what process is unfolding?

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Definitions:

SSRIs

Selective Serotonin Reuptake Inhibitors, a class of drugs used to treat depression and anxiety by increasing serotonin levels in the brain.

Electroconvulsive Therapy (ECT)

The use of electricity to induce a seizure in mental patients by placing electrodes on the skull and administering a convulsive rather than a lethal shock intensity.

Treating Disorders

The process of managing and alleviating symptoms of mental or physical health conditions.