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Question: Which asks about the intuition of both the AD-AS figures and the I-NS figures, specifically relating them to long-term growth.
Suppose that the economy uses (only) two major inputs in its production: capital (K) and labour (L). Suppose also that we are thinking about long-term growth, specifically through productivity growth.
Now suppose that the Aggregate Demand (AD) remains fixed through this period, and that we begin in long-run equilibrium.
1. If AD remains fixed, and the growth in the economy's productivity occurs, then what would happen to (i) the price level (p), (ii) Real GDP (Y), and (iii) the price of inputs (L & K) in the economy? Explain your answer using the AD-AS model.
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