Aggregate Supply and Demand

Plot each of the following scenarios on a qualitative graph with aggregate demand, short-run aggregate supply, and long-run aggregate supply. Measure the aggregate price level (P) on the vertical axis in your graphs and measure real GDP (Y) on the horizontal axis in your graphs. Then describe the way in which the economy will return to the long-run equilibrium if there is no fiscal or monetary policy intervention and include this long run adjustment in the same graph. Describe verbally what happens to output and prices in the short run and then the long run. For each scenario, assume that the economy starts in long run equilibrium, then moves to a short run equilibrium before returning to a long run equilibrium.

a) A stock market panic results in many bank closures causing many people to lose their savings.

b) Oil prices unexpectedly increase sharply and this causes an increase in production costs for many producers in the economy.

c) A new computer technology improves the productive capacity of the economy.

d) The government announces a higher than expected increase in GDP for last year, resulting in increased consumer confidence.