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A-Level Economics · Keynesian LRAS (spare capacity) diagram question
The economy is in a deep recession, so AD₁ crosses the Keynesian LRAS on its FLAT range. Which point is that equilibrium?
The diagram
The answer
Point E. AD₁ meets the flat range at point E: output only 2, price level 2 — masses of idle labour and capital. Equilibrium is the CROSSING of AD with the AS curve: AD₁ meets the horizontal section at point E, output 2, price level 2. That flat section is what a Great Depression, 2008 or Covid-style demand collapse looks like on a diagram — huge spare capacity.
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