Suppose that a contractionary monetary policy has caused aggregate demand to fall to AD ₁ , as shown in the graph at right. The economy is currently in short-run equilibrium at point E ₁ . At this point, unemployment is I the natural rate of unemployment and spells of unemployment are - average. Long-run equilibrium will be restored when price expectations have time to adjust to a new level.

1) Using the line or 3-point curved line drawing tool, show the adjustment to long-run equilibrium. Properly label your new curve. 2) Using the point drawing tool, identify the new Iong-run equilibrium point and label your point 'E ₂ '.

Options for blanks

1) less than, grater than, equal to

2) longer than, shorter than, same as

3) lower, higher

Transcribed Image Text:

Price Level E₁ LRAS SRAS Real GDP per year ($ trillions) AD AD₁ Price Level E₁ LRAS SRAS Real GDP per year ($ trillions) AD AD₁

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At this point unemployment is below the nat... View the full answer