Answer to Question #114397 in Macroeconomics for jasmin

Question

Now assume that for some reason Aggregate Demand shifts to the left
(downwards) and suppose wages fully adjust. By using the AS-AD graph, show the
effects of this shift on the equilibrium output and price level in the Short-Run and in
the Long-run.

Answer 1

If the AD curve shifts to the left, then the equilibrium quantity of output and the price level will fall. Whether equilibrium output changes relatively more than the price level or whether the price level changes relatively more than output is determined by where theAD curve intersects with the AS curve.