In the Below Diagram Assume That the Aggregate Demand Curve

question 152

Essay

In the below diagram assume that the aggregate demand curve shifts from AD₁ in year 1 to AD₂ in year 2,only to fall back to AD₁ in year 3.

(a)Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.
(b)Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position,P_b and GDP_b for the price level and real GDP respectively.
(c)Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position,P_c and GDP_c for the price level and real GDP respectively.

---

Definitions:

Retained Earnings

The portion of a company's profits that is held or retained and not paid out as dividends to shareholders, often used for reinvestment in the business or to pay off debt.

Dividend-Related Liability

A financial obligation arising when a company declares dividends payable to shareholders, to be settled on the dividend payment date.

Stock Dividends Distributable

A portion of a company's earnings decided by the board of directors to be distributed to its shareholders in the form of additional shares.

Retained Earnings

The portion of net earnings not distributed as dividends to shareholders but retained by the company for reinvestment.