Consider the exhibit below for the following questions.
Figure 23-1
-Refer to Figure 23-1.If the economy starts at A and there is a fall in aggregate demand,the economy moves
A) back to A in the long run.
B) to B in the long run.
C) to C in the long run.
D) to D in the long run.

Question

Consider the exhibit below for the following questions.
Figure 23-1 
-Refer to Figure 23-1.If the economy starts at A and there is a fall in aggregate demand,the economy moves
A) back to A in the long run. 
B) to B in the long run. 
C) to C in the long run. 
D) to D in the long run.

Quizplus · Accepted Answer

If there is a fall in aggregate demand, the economy will initially move from point A to point B in the short run. However, in the long run, wages and prices will adjust, leading to a shift in the short run aggregate supply curve to the right until the economy reaches the natural rate of output at point C. At point C, there is no longer a gap between actual and potential output, and the economy is at full employment equilibrium.

Consider the Exhibit Below for the Following Questions