AS-LR
6
5
4
2
0 3
P*
9
10
1
8
7
AD4
AD3
ADstart
AD2
AD1
YFE
In all cases, the economy begins with ADstart andAS-LR.
1) AD decreases to AD2. In the Short Run, the
economy will be at point #_9_. The Long Run
Equilibrium will be at point # _10__
2) AD increases to AD3. In the Short Run, the economy
will be at point #_3_. The Long Run Equilibrium
will be at point # _5_
3) AD increases to AD4. In the Short Run, the economy
will be at point #_4_. The Long Run Equilibrium
will be at point # _6_
4) Moving from point 0 to point 9, income goes _↓_
and prices go _↓_
5) Moving from point 0 to point 7, income goes _stays
the same_ and prices go _↓__
6) Moving from point 0 to point 3, income goes _↑_
and prices go _↑_
7) Moving from point 0 to point 2, income goes _↓_
and prices go _↑_
8) Moving from point 0 to point 2 requires that
employment goes _↓_ and unemployment goes _↑_
Note: when income goes down in the short run,
then employment went down and unemployment
went up. Vice versa: when income goes up in the
short run, then employment went up and
unemployment when down.
9) Moving from point 8 to point 7 requires that
employment goes _↑_ and unemployment goes _↓_
10) Moving from point 0 to point 8 requires that
employment goes _↓_ and unemployment goes _↑_
11) All points representing long run equilibrium are #’s:
7, 10, 0, 5, 6 (all the points on the AS long run
curve)
12) All points representing a recession are #’s: 8, 9, 2
(all the points to the left of full employment
income, YFE)
13) In Keynesian theory, all points representing
disequilibriums are #’s: 8, 9, 2, 3, 4, 1 (all the
points that aren’t long run equilibriums)
14) Moving from point 8 to point 7, income goes _↑_,
unemployment goes _↓_, and the economy is
undergoing a recession/recovery?
15) The worst economy would be characterized by point
_8_ (the lowest income level)
16) If Consumer Confidence drops, in the short run the
economy will be at point #_9 or 8__. Prices go _↓_.
Income goes _↓_. Unemployment goes _↑_. In the
long run, the economy will be at point #__10 or 7__
and income and unemployment will be at __natural
rate or full employment___ Note: the reason for
this is because and Consumer Confidence drops,
AD decreases to AD1 or AD2
17) If Investor Sentiments increase, in the short run the
economy will be at point #_3 or 4_. Prices go _↑_.
Income goes _↑_. Unemployment goes _↓. Note:
this is because the rise in Investor Sentiments
causes AD to increase to AD3 or AD4.