If the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000
,current inflation ( )equals 0.06 (6%),and potential output (Y*)equals 19,200,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%.
A) 19,200;4
B) 19,200;6
C) 18,800;4
D) 18,800;6
E) 18,400;8

Question

If the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000 
,current inflation (  )equals 0.06 (6%),and potential output (Y*)equals 19,200,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%.
A) 19,200;4 
B) 19,200;6 
C) 18,800;4 
D) 18,800;6 
E) 18,400;8

Quizplus · Accepted Answer

In the short run, equilibrium output is found where the ADI curve intersects the 45-degree line. So, setting Y = 20,000 - 20,000(0.06) = 18,800, we get equilibrium output in the short run. 
In the long run, equilibrium output reverts to potential output (Y*=19,200) and the inflation rate is equal to the expected inflation rate (which is equal to the current inflation rate of 6%). Therefore, the inflation rate in the long run is 6%. 
The only choice that gives the correct equilibrium output in the short run and inflation rate in the long run is C: 18,800 and 4, respectively.

If the Aggregate Demand (ADI)curve in an Economy Is Y