Suppose the economy is initially in equilibrium at an output level of 100 and price level of 100. The Fed then manages to shift aggregate demand rightward by 20. L04

(a) Illustrate the initial equilibrium (E,) and the shift of AD.

(b) Show what happens to output and prices if the aggregate supply curve is (i) horizontal, (ii) vertical, and (iii) upward-sloping.