Explain adjusting the long run equilibrium by shifting the AD and AS curve.
The following graph shows the economy in long-run equilibrium. Suppose that there is an unexpected rise in the price of an important raw material.
Which of the following best explains how and why the economy will adjust back to long run equilibrium?
1.Aggregate supply will increase as firms and workers adjust to the new. Higher price level.
2.Aggregate supply will increase (shift rightward) as the recession makes firms and workers willing accept lower wages and prices.
3.Aggregate demand will decrease, restoring the original equilibrium price and quantity.
4.Aggregate supply will decrease (shift leftward) as firms and workers adjust to the new higher price level.