In the aggregate demand/aggregate supply model,an economy operating below its long-run potential capacity will experience
A)falling real wages and resource prices that will increase SRAS,moving the economy back toward full employment.
B)rising interest rates that will increase SRAS,moving the economy back toward full employment.
C)inflation that will stimulate additional spending and thereby restore full employment.
D)a prolonged economic depression unless consumer optimism is increased.

Question

Quizplus · Accepted Answer

When an economy is operating below its long-run potential capacity, there is a surplus of resources, including labor. This leads to falling real wages and resource prices, which will increase Short-Run Aggregate Supply (SRAS) since firms find it cheaper to produce. As SRAS increases, the economy will move back toward full employment. This process is known as self-correction. Therefore, option A is the best choice. The other choices (B, C, and D) are not correct because rising interest rates (B) would decrease Aggregate Demand (AD), leading to lower output and employment; inflation (C) would decrease AD due to the inflationary expectations and reduce output and employment, and consumer optimism (D) is insufficient to increase AD to full employment in the short run.

In the Aggregate Demand/aggregate Supply Model,an Economy Operating Below Its