3. The labor market and the three slates of the economy Step 1: States ofle Economy The following graph shows the aggregate demand curve [AD], the shortrun aggregate supply.r curve {SEAS}, and the longrun aggregate SUDDIY curve {LRAS} of an economy. Real GDP and Natural Real GDP AD 200 LFLAS 130 130 140 120 100 PRICE LE'u'EL 3 AS a 1 2 a 4 5 a 7 a 9 10 REAL GDP (Trillions of dollars) 111a shortrun equilibn'um output level is v , and the economy is operating v . As a result, v exists in the labor market of this economy. Consider the following scenario: The economy is in long-run equilibrium, as short-run equilibrium output is equal to the Natural Real GDP of $6 trillion. The following graph shows two production possibilities frontiers (PPFs) for the economy. The PPF closer to the origin (blue curve) is the economy's institutional PPF, and the PPF farther from the origin (purple curve) is the economy's physical PPF. Place the grey point (star symbol) on one of the black points (plus symbol) to indicate the state of the economy when it is operating at the short- run equilibrium described above. Two PPFS 10 Physical PPF State of Economy CO X B Institutional PPF ALL OTHER GOODS (Thousands of units) 3 2 2 3 5 6 7 8 9 10 GOOD X (Thousands of units) In time, wages and costs of production will likely