How an economy self-adjusts to full-employment equilibrium without government intervention: Source--Gwartney Section 10-7

A. Draw an Aggregate Supply/Aggregate Demand graph of an economy that is initially in Long-Run Equilibrium.

B. Then, on your graph, show the short-run impact of a sudden decrease in Aggregate Demand.

C. Referring to the AD-AS model, explain how changes in resource prices, interest rates, and currency exchange rates will direct the economy back toward full employment. REQUIRED: Use graphical analysis (AD-AS model) to support your explanation.