1. The graph below indicates an economy originally in long-run equilibrium at potential output. (Subscripted by...

 

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1. The graph below indicates an economy originally in long-run equilibrium at potential output. (Subscripted by 0.) A. On the graph, indicate a recessionary gap that arises because of a negative shock to aggregate demand. Indicate the short-run price level, output, AD curve, and SAS curve with a 1 subscript. Show on the graph how the economy returns to full potential output in the long run under the Classical Theory. Indicate the new long-run price level, output, AD curve, and SAS curve with a 2 subscript. In a sentence or two, explain how the economy returns to full potential output. B. Dynamics for a Recessionary Gap: The Classical Theory Price Level Po LAS Y₁=Yp SASO ADO Output 1. The graph below indicates an economy originally in long-run equilibrium at potential output. (Subscripted by 0.) A. On the graph, indicate a recessionary gap that arises because of a negative shock to aggregate demand. Indicate the short-run price level, output, AD curve, and SAS curve with a 1 subscript. Show on the graph how the economy returns to full potential output in the long run under the Classical Theory. Indicate the new long-run price level, output, AD curve, and SAS curve with a 2 subscript. In a sentence or two, explain how the economy returns to full potential output. B. Dynamics for a Recessionary Gap: The Classical Theory Price Level Po LAS Y₁=Yp SASO ADO Output

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SOLUTION We are discussing the recessionary gap in the classical theory EXPLANATION NB ... View the full answer