In the Below Diagram Assume That the Aggregate Demand Curve

Essay

In the below diagram assume that the aggregate demand curve shifts from AD₁ in year 1 to AD₂ in year 2,only to fall back to AD₁ in year 3.

(a)Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.
(b)Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position,P_b and GDP_b for the price level and real GDP respectively.
(c)Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position,P_c and GDP_c for the price level and real GDP respectively.