The graphs below illustrate an initial equilibrium for the economy. Suppose that

Question

The graphs below illustrate an initial equilibrium for the economy. Suppose that firms' expectations of future profits decreases Use the graphs to show the new positions of and long-run aggregate supply (LRAS) in both the short-run and the long-run, as well as the short-run a long-run equilibria resulting from this change. Then answer what happens to the price level and GDP te demand (AD), short-run aggregate supply (SRAS), Short-Run Graph Long-Run Graph LRAS LRAS SRAS Equilibrium ong-Run Equilibrium AD AD Real GDP Real GOFP In the short-run, the price level increases and GDP increases In the long-run, the price level Increases and GDP decreases à Previous Give Up & View Solution Check Answer Next Exit

Explanation / Answer

If the firms expectations of future profits decreases, this will mean that firms will supply less. This will cause the SRAS to shift left wards. This will cause the price level to increase and the output level to fall.

In the long run, the economy adjusts back to equilibrium and so the price level increases and the output level rises until the economy settles back at equilibrium. There is no impact on aggregate demand.

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