Use a dynamic aggregate demand and aggregate supply graph to explain the effect

Question

Use a dynamic aggregate demand and aggregate supply graph to explain the effect of policies that raise the economy's long-term potential growth rate without any inflation The aggregate demand, short-run aggregate supply, and long-run aggregate supply curves will remain unchanged The new long-run equilibrium will be where O A· the new aggregate demand curve intersects the new short-run aggregate supply curve at a new long-run aggregate supply curve O B. the new aggregate demand curve intersects the new short-run aggregate supply curve at the original long-run aggregate supply curve. ? C the original aggregate demand curve intersects the new short run aggregate supply curve at he origina on r aggregate Suppl re O D· the new aggregate demand curve intersects the original short-run aggregate supply curve at the original long-run aggregate supply curve As a result of the fiscal policy, potential GDP

Explanation / Answer

Aggregate demand, short run aggregate supply and long run aggregate supply curves will SHIFT TO THE RIGHT.

new long run equilibrium will be where-

The new aggregate demand curve intersects the new short run aggregate supply curves at a new long run aggregate supply curve.

As a result of fiscal policy potential gdp will increase.

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