Unit 8: Aggregate Demand and Aggregate Supply e. For each of the scenarios Identify what happens in the long run to the aggregate price Consider an economy that is Initially in long-run equilibrium as drawn in the following level and the aggregate output level if there is no active stabilization policy. graph where LRAS is the long-run AS curve, AD, is the aggregate demand curve, SRAS, is the short-run AS curve, Y, is potential output, and P, is the equilibrium aggregate price level. Aggregate price level X. . Identify verbally what happens to aggregate output and the aggregate price level rela- tive to the initial long-run equilibrium for each of the scenarios. Real GDP a. Draw a graph using the AS-AD model to illustrate the effect of each of the following separate changes to the model in the short run. c. For each of the scenarios determine whether the economy faces a short-run reces- sionary gap or an inflationary gap. (1) The economy's central bank decreases the money supply. Aggregate price level d. For each of the scenarios determine if there is an active stabilization policy that will offset the particular shock. If so, discuss what this active stabilization policy is. You Real GDP may find it helpful to draw a graph illustrating the effects of your active policy pre- scription on the aggregate economy. (2) Productivity decreases in the economy. Aggregate price level Real GDP (3) Consumer confidence in the economy increases. Aggregate price level Real GDP (4) Commodity prices fall dramatically. Aggregate price level Real GDP