diagram analysis

• What is the expected outcome of the increase in AD from AD 1 to AD 2?

  It will lead to a positive output gap.
• Why is the economy considered to be in long-term disequilibrium?

  SRAS 1 and AD 2 do not intersect on the LRAS curve.
• What is the short-term equilibrium price and output level?

  P2Y2
• What does over-full employment imply for firms?

  Firms will bid up wages to attract workers.
• What happens to the short-run aggregate supply (SRAS) as a result of increased wages?

  SRAS shifts to SRAS 2 due to higher costs.
• What is the final output level and price after the shifts in the economy?

  They produce at Y1P3.
• How has the short-run equilibrium changed in relation to the long-run equilibrium?

  It has shifted to match the long-run equilibrium.
• LRAS diagram