Questions: Assume that Country A's economy is at equilibrium point E0. Only the shifts and equilibrium points shown in the following AD/AS diagram are possible. There is an increase in the prices of inputs that are widely used in production, while other components of aggregate demand and supply remain unchanged. What is the new equilibrium? Select the best answer. E6 E2 E3 E8

Assume that Country A's economy is at equilibrium point E0. Only the shifts and equilibrium points shown in the following AD/AS diagram are possible. There is an increase in the prices of inputs that are widely used in production, while other components of aggregate demand and supply remain unchanged. What is the new equilibrium? Select the best answer.

E6
E2
E3
E8

Transcript text: Assume that Country A's economy is at equilibrium point $E_{0}$. Only the shifts and equilibrium points shown in the following AD/AS diagram are possible. There is an increase in the prices of inputs that are widely used in production, while other components of aggregate demand and supply remain unchanged. What is the new equilibrium? Select the best answer. $E_{6}$ $E_{2}$ $E_{3}$ $E_{8}$

Solution

Solution Steps

Step 1: Identify the initial equilibrium point

The initial equilibrium point is given as $ E_0 $, where the initial aggregate demand curve $ AD_0 $ intersects the initial short-run aggregate supply curve $ SRAS_0 $.

Step 2: Determine the effect of an increase in input prices

An increase in the prices of inputs widely used in production will cause the short-run aggregate supply curve to shift to the left. This is because higher input prices increase production costs, reducing the quantity of goods and services that firms are willing to supply at any given price level.

Step 3: Identify the new equilibrium point

With the leftward shift of the short-run aggregate supply curve from $ SRAS_0 $ to $ SRAS_1 $, the new equilibrium point will be where the new short-run aggregate supply curve $ SRAS_1 $ intersects the initial aggregate demand curve $ AD_0 $. This intersection occurs at point $ E_6 $.

Final Answer

The new equilibrium point is $ E_6 $.

Was this solution helpful?

Unhelpful

Helpful

Questions asked by other users

< Previous Next >

Thank you for your feedback.

Copied!