Consider the exhibit below for the following questions.
Figure 14-1
-Refer to Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?
A)It moves back to A.
B)It moves to B.
C)It moves to C.
D)It moves to D.

Question

Consider the exhibit below for the following questions.
Figure 14-1 
-Refer to Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?
A)It moves back to A. 
B)It moves to B. 
C)It moves to C. 
D)It moves to D.

Quizplus · Accepted Answer

If there is a fall in aggregate demand, then aggregate output and employment will both decrease, as shown by the initial shift from AD to AD1. In the short run, the economy will be at point B, where the equilibrium AD1 and SRAS intersect. However, in the long run, wages and prices will adjust to the new level of output, causing the SRAS curve to shift to the right, from SRAS to LRAS, until the economy reaches the long-run equilibrium at point C, where LRAS and AD1 intersect. Therefore, the economy will move from A to C in the long run.

Consider the Exhibit Below for the Following Questions