In the diagram, the economy's relevant aggregate demand and long-run aggregate supply curves, are lines
A) 4 and 2, respectively.
B) 4 and 1, respectively.
C) 2 and 4, respectively.
D) 2 and 3, respectively.

Question

In the diagram, the economy's relevant aggregate demand and long-run aggregate supply curves, are lines
A) 4 and 2, respectively. 
B) 4 and 1, respectively. 
C) 2 and 4, respectively. 
D) 2 and 3, respectively.

Quizplus · Accepted Answer

The intersection of the aggregate demand and long-run aggregate supply curves occurs at point E, which represents the economy's potential output. The relevant aggregate demand curve is AD1, which intersects the long-run aggregate supply curve (LRAS) at point E. Therefore, the relevant aggregate demand curve is line 4, and the long-run aggregate supply curve is line 1. Thus, the best choice is B: 4 and 1, respectively.

In the Diagram, the Economy's Relevant Aggregate Demand and Long-Run