Answer to Question #120477 in Macroeconomics for Rahat

Question

AD shocks can change the equilibrium level of income (Y) and price (P). But the division of effects between P and Y depends on the shape of the SRAS curve. Suppose if there is a contractionary AD shock to economy, using graphs show us what happens to P,Y and the size of multiplier when SRAS is upward sloping

Answer 1

Aggregate demand from AD1 to AD2 Short-term supply from SRAS2 to SRAS1. A new equilibrium point will appear in vol. B. This will lead to a drop in production volumes and higher prices. This is stagflation.

The multiplier will decrease, so in such a situation there will be a decrease in the growth rate of investment in the economy, this is a depressed state of the economy