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Question 1 A student was asked to draw an aggregate demand and aggregate supply graph to illustrate the effect of an increase in aggregate supply.
Question 1 A student was asked to draw an aggregate demand and aggregate supply graph to illustrate the effect of an increase in aggregate supply. The student drew the following graph: Price level SRAS, SRASZ P1 Pa AD2 AD, Real GDP (billions of dollars) The student explained the graph as follows: An increase in aggregate supply causes a shift from SRAS, to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment and net exports will increase. This change causes the aggregate demand curve to shift to the right, from AD, to AD2. We know that real GDP will increase but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted further to the right. I assume that aggregate supply shifts out further than aggregate demand, so I show the final price level, P3, as being lower than the initial price Level P,. Explain whether you agree or disagree with the student's analysis. Be careful to explain exactly what-if anything-you find wrong with this analysis
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