Expand view Final Exam Grading To resize a Hold down key combination Shift, Alt,

Question

Expand view Final Exam Grading To resize a Hold down key combination Shift, Alt, or Shift, Alt, or Move below handle 2 The exhibit given below shows the short-run aggregate demand and supply curves in an economy, AD1 and AS and the long-run aggregate supply curve, LRAS. The economy was initially in equilibrium when there was a decrease in aggregate demand, causing a shift of the aggregate demand curve from AD, to AD2 Which of the following is true in this case? Price level LRAS red AD ered AD2 ered Real GDP

Explanation / Answer

Correct option -B.

The economy was in equilibrium at point C when AS1=AD1.Then there was a decrease in AD.The AD shifts to the left to AD2.Currently AS is unaffected.Equilibrium occurs at B where AD2 and AS1 are equal in the short.

However, in the long run the economy moves to point A because in the long run the economy operates at full employment level.At this point AS,AD and LRAS must be equal.Equilibrium is restored at A.

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