Assume that initially economy is in the long-run equilibrium. For each of the fo
ID: 1104759 • Letter: A
Question
Assume that initially economy is in the long-run equilibrium. For each of the following scenarios, say what will happen in the long run.
1.) Because of a negative demand shock output in the short run is below original potential output. In the long run:
A. AD shifts to the right and brings economy back to original potential output.
B. SRAS shifts to the left and brings economy back to original potential output.
C. Equilibrium is achieved at a lower level of potential output.
D. Equilibrium is achieved at a higher level of potential output.
E. SRAS shifts to the right and brings economy back to original potential output.
F. AD shifts to the left and brings economy back to original potential output.
2.) Because of a negative temporary supply shock current output is below original potential output. In the long run:
A. SRAS shifts to the right and brings economy back to original potential output.
B. AD shifts to the right and brings economy back to original potential output.
C. SRAS shifts to the left and brings economy back to original potential output.
D. AD shifts to the left and brings economy back to original potential output.
E. New long-run equilibrium is achieved at a higher level of potential output.
F. New long-run equilibrium is achieved at a lower level of potential output.
3.) Because of a positive demand shock current output is above original potential output. In the long run
A. AD shifts to the left and brings economy back to original potential output.
B. New long-run equilibrium is achieved at a lower level of potential output.
C. AD shifts to the right and brings economy back to original potential output.
D. New long-run equilibrium is achieved at a lower level of potential output.
E. SRAS shifts to the left and brings economy back to original potential output.
F. New long-run equilibrium is achieved at a higher level of potential output.
4.) Because of a positive temporary supply shock current output is above original potential output. In the long run
A. AD shifts to the right and brings economy back to original potential output.
B. SRAS shifts to the right and brings economy back to original potential output.
C. AD shifts to the left and brings economy back to original potential output.
D. New long-run equilibrium is achieved at a lower level of potential output.
E. New long-run equilibrium is achieved at a higher level of potential output.
F. SRAS shifts to the left and brings economy back to original potential output.
5.) Because of a positive permanent supply shock current output is above original potential output. In the long run
A. New long-run equilibrium is achieved at a higher level of potential output.
B. SRAS shifts to the left and brings economy back to original potential output.
C. New long-run equilibrium is achieved at a lower level of potential output.
D. AD shifts to the left and brings economy back to original potential output.
E. SRAS shifts to the right and brings economy back to original potential output.
F. AD shifts to the right and brings economy back to original potential output.
6.) Because of a negative permanent supply shock current output is below original potential output. In the long run:
A. AD shifts to the right and brings economy back to original potential output.
B. SRAS shifts to the left and brings economy back to original potential output.
C. SRAS shifts to the right and brings economy back to original potential output.
D. AD shifts to the left and brings economy back to original potential output.
E. New long-run equilibrium is achieved at a higher level of potential output.
F. New long-run equilibrium is achieved at a lower level of potential output.
Explanation / Answer
1) The SRAS curve will shift to the right and bring back the economy to original potential level of output.
Thus the correct option is (B)
2 The SRAS shifts to the left to bring the economy back to the potential level. Thus the correct option is (C)
3. There will be adjustment in the SRAS . SRAS will adjust to the left and bring the economy to the potential level. The correct option is (E)
4. the correct option is (B)