Initial AD curve before economic shock

Steps:

• Identify the starting equilibrium in the AD-AS diagram where price level and output are at baseline.
• Note any shift in AD that moves the equilibrium to a new position, such as higher output or inflation.
• Trace back to the curve that originally intersected the AS at the initial equilibrium point.
• Confirm the initial AD by its position relative to subsequent shifts (e.g., rightward for expansion).

Why A is correct:

• AD1 represents the original demand level that equilibrates with short-run AS at the economy's potential output, per the AD-AS model.

Why the others are wrong:

• B: AD2 shows post-expansion demand, causing higher output and prices.
• C: AD3 indicates further demand increase, leading to inflationary gap.
• D: AD4 reflects even higher demand, overstating initial conditions.

Final answer: A