The economy is at point A in the accompanying diagram....

The economy is at point $A$ in the accompanying diagram. Suppose that the aggregate price level rises from $P_{1}$ to $P_{2} .$ How will aggregate supply adjust in the short run and in the long run to the increase in the aggregate price level? Illustrate with a diagram.

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Key Concepts

Adjustment Mechanism from Short Run to Long Run

The adjustment mechanism describes how the economy transitions from a short-run disequilibrium to a long-run equilibrium. An increase in the price level initially boosts output (short-run effect), but as wages and input prices adjust upward in response to the higher price level, the SRAS curve shifts leftward, returning the economy to its full-employment level of output in the long run.

Long-run Aggregate Supply (LRAS)

LRAS represents the economy's full-employment output, which is determined by factors such as technology, resources, and institutions. In the long run, the supply is vertical because all prices, including wages, are flexible, so changes in the aggregate price level do not alter the real output level.

Short-run Aggregate Supply (SRAS)

SRAS refers to the relationship between the aggregate price level and the quantity of goods and services supplied when some input prices, like wages, are sticky. In the short run, a rise in the aggregate price level can lead to higher output because firms experience relatively lower real costs, prompting them to produce more until input prices adjust.

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