Question $4(16$ marks total$)$

The following equations describe the aggregate demand $($AD$),$ the long$-$run aggregate supply $($LRAS$)$ and the short$-$run aggregate supply $($SRAS$)$ of a closed economy:

$,$ AD: $,Y=C+I+G$

LRAS: $Yn=AF(L,K)$

$,$ SRAS: $Y=Yn+a(P-Pe)$

where Y is output, C private consumption, I investment, G government spending, L labor, K physical capital, A the technology level, Yn the potential output, P the actual price level, Pe the expected price level, and $a$ is a fixed constant.

a$)$ Suppose this economy is initially in long$-$run equilibrium, and then the level of technology $($i$.$e$.$ A$)$ increases as a result of the recent big advance of AI technology, and this is the only change in the AD$,$ LRAS, and SRAS described above. Show this change with an AD$-$AS diagram. Explain the shift of each curve and the relative position of the curves before and after the change.

$(6$ marks$)$

b$)$ Is the economy in long$-$run equilibrium after the change described in Parts a$)?$ Explain.

$(3$ marks$)$

c$)$ If your answer to b$)$ is no$.$ explain how and why the economy will move back to the longrun equilibrium, and show it in the diagram $($you may use the same diagram$).(4$ marks$)$

d$)$ Going back to Part a$),$ given that the technological progress mentioned there did happen, what other information given there does not seem realistic. Explain.

$(3$ marks$)$