Question 7 (16 marks) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long- run equilibrium at point A. AS Price Level 110 D 90 60 E AD1 -AD2 700 500 900 1000 1250 Real GDP a. A negative shock to the economy shifts the AD curve from ADI to AD2. What is the initial effect? Answer: b. After the negative aggregate demand shock shown in the diagram (from ADI to AD2), explain how the adjustment process that would return the economy to its long-run equilibrium? Answer: c. Following the negative AD shock shown in the diagram (from ADI to AD2), the adjustment process will take the economy to a long-run equilibrium. What is the price level and real GDP in long-run equilibrium? Answer: BUSI 2003 . MACROECONOMICS IN THE GLOBAL CONTEST STUDENT SIGNATURE