How are long-run economic growth and short-run fluctuations during a business cycle represented using the production possibilities curve model?
Long-run economic growth is represented by an outward shift of the production possibilities curve. Short-run fluctuations are represented by a movement from a point below the production possibilities curve toward a point on the production possibilities curve (this shows an economic recovery/expansion) or by a movement to a point farther below the production possibilities curve (this shows a recession/contraction).
Question
How are long-run economic growth and short-run fluctuations during a business cycle represented using the aggregate demand–aggregate supply model?
Long-run economic growth is represented by a rightward shift of the long-run aggregate supply curve. Short-run fluctuations are represented by shifts in aggregate demand or short-run aggregate supply that cause movements of short-run equilibrium output (the level of real GDP at the intersection of short-run aggregate supply and aggregate demand) above or below potential output.