MOD-2.I—Explain (using graphs as appropriate) the response of output, employment, and the price level to an aggregate demand or aggregate…

Explain (using graphs as appropriate) the response of output, employment, and the price level to an aggregate demand or aggregate supply shock in the long run.

• In the long run, in the absence of government policy actions, flexible wages and prices will adjust to restore full employment and unemployment will revert to its natural rate after a shock to aggregate demand or short-run aggregate supply. [See EK MEA-1.E.2]
• Shifts in the long-run aggregate supply curve indicate changes in the full-employment level of output and economic growth.
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.