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AD-AS Model: Equilibrium in the Short Run and Long Run quiz #1 Flashcards

AD-AS Model: Equilibrium in the Short Run and Long Run quiz #1
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  • In the AD-AS model, what determines long run equilibrium in the economy?
    Long run equilibrium in the AD-AS model occurs where the aggregate demand (AD), short run aggregate supply (SRAS), and long run aggregate supply (LRAS) curves all intersect at a single point, determining the equilibrium price level and real GDP.
  • What does the vertical LRAS curve represent in the AD-AS model?
    The vertical LRAS curve represents the economy's potential output or full employment level of real GDP, which does not change with the price level.
  • How is the short run equilibrium determined in the AD-AS model?
    Short run equilibrium is found where the aggregate demand (AD) curve intersects the short run aggregate supply (SRAS) curve, which may not coincide with the LRAS curve.
  • What happens to the short run equilibrium if the aggregate demand curve shifts to the left?
    If the AD curve shifts left, the new short run equilibrium occurs at a lower price level and lower real GDP where the new AD curve meets the SRAS curve.
  • Why is it helpful to use different colors when drawing shifted curves in the AD-AS model?
    Using different colors helps distinguish between the original curves and the shifted curves, making it easier to see changes in equilibrium.
  • On which axes are price level and real GDP plotted in the AD-AS model graph?
    Price level is plotted on the y-axis and real GDP is plotted on the x-axis.
  • Can the short run equilibrium differ from the long run equilibrium in the AD-AS model?
    Yes, the short run equilibrium can differ from the long run equilibrium if the AD or SRAS curves shift, causing the intersection point to move away from the LRAS curve.
  • What does the intersection of all three curves (AD, SRAS, LRAS) indicate in the AD-AS model?
    The intersection of all three curves indicates the long run equilibrium, where the economy is at full employment and stable price level.
  • What is the shape of the aggregate demand curve in the AD-AS model?
    The aggregate demand curve is downward sloping, indicating an inverse relationship between the price level and real GDP demanded.
  • What is the main takeaway about short run equilibrium in the AD-AS model?
    The main takeaway is that short run equilibrium does not necessarily occur at the long run equilibrium point where all three curves intersect.