Consider the exhibit below for the following questions.
Figure 33-1
-Refer to Figure 33-1.If the economy starts at A and moves to D in the short run,the economy
A) moves to A in the long run.
B) moves to B in the long run.
C) moves to C in the long run.
D) stays at D in the long run.

Question

Consider the exhibit below for the following questions.
Figure 33-1 
-Refer to Figure 33-1.If the economy starts at A and moves to D in the short run,the economy
A) moves to A in the long run. 
B) moves to B in the long run. 
C) moves to C in the long run. 
D) stays at D in the long run.

Quizplus · Accepted Answer

In the long run, the economy will adjust to full employment which is represented by point C on the graph. As the economy moves from point A to D in the short run, there is an increase in output and employment, but also an increase in inflation. This leads to an increase in the price level, which shifts the aggregate demand curve leftward until it intersects the long-run aggregate supply curve at point C. At this point, output is at its potential level and there is no inflationary pressure in the economy. Therefore, the economy will settle at point C in the long run.

Consider the Exhibit Below for the Following Questions