Figure 10-3 Starting from long-run equilibrium at point A in Figure 10-3, at which of the following points would short-run equilibrium occur immediately following an unanticipated increase in stock prices?
A) A
B) B
C) C
D) D

Question

Figure 10-3  Starting from long-run equilibrium at point A in Figure 10-3, at which of the following points would short-run equilibrium occur immediately following an unanticipated increase in stock prices?
A) A 
B) B 
C) C 
D) D

Quizplus · Accepted Answer

An unanticipated increase in stock prices would cause an increase in wealth, leading to an increase in consumption and an increase in aggregate demand. In the short run, the economy would move up the SRAS curve, leading to higher output and higher prices. Point B is the intersection of the AD and SRAS curves that occurs at a higher price level and output level than the long-run equilibrium point A, indicating that short-run equilibrium would occur at point B.

Figure 10-3 Starting from Long-Run Equilibrium at Point a in Figure