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The following graph shows the short-run aggregate-supply curve (AS), the aggregate-demand curve (AD)), and the long-run aggregate-supply curve (LRAS) for a hypothetical economy. Initially, the
The following graph shows the short-run aggregate-supply curve (AS), the aggregate-demand curve (AD)), and the long-run aggregate-supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural rate of output, $110 billion. Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services in this economy. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the severe weather on the natural rate of output. (? 130 LRAS O 125 AS AD 120 115 AS PRICE LEVEL 110 105 LRAS 100 AD 90 95 100 105 110 115 120 125 130 OUTPUT (Billions of dollars)The shortrun economic outcome resulting from the increase in production costs is known as v . Now suppose that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run economic impact of the severe weather. In the long-run, when the government pursues accommodative policy, the output in the economy.f will be -bi||ion and the price level will
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