Q1. Consider an economy which is above full-employment equilibrium (natural rate of output) due to raise in AD. The prices of productive resources have not changed. With the help of graph, describe how the economy returns to long-run equilibrium, with no government intervention.
Q2. Consider an economy where the economists have estimated that last year's real GDP was $800 billion, equivalent to potential GDP. The price level was 105. Assume that this year the economist estimate that the potential GDP has raised by 10%. Though, actual real GDP has reduced by 5%, while the price level has as well reduced by 5%. Draw an AD-AS graph that shows last year's equilibrium, and also last year's demand, aggregate supply (short-run and long-run), price level, and real GDP level. Next, given the information above, show what has happened to the price level and level of real GDP this year (show this year's equilibrium), plus what has happened to the aggregate demand, short-run aggregate supply and the long-run aggregate supply since last year.