Expand view Final Exam Grading To resize a Hold down key com

Expand view Final Exam Grading To resize a Hold down key combination Shift, Alt, or Shift, Alt, or Move below handle 2 The exhibit given below shows the short-run aggregate demand and supply curves in an economy, AD1 and AS and the long-run aggregate supply curve, LRAS. The economy was initially in equilibrium when there was a decrease in aggregate demand, causing a shift of the aggregate demand curve from AD, to AD2 Which of the following is true in this case? Price level LRAS red AD ered AD2 ered Real GDP

Solution

Correct option -B.

The economy was in equilibrium at point C when AS1=AD1.Then there was a decrease in AD.The AD shifts to the left to AD2.Currently AS is unaffected.Equilibrium occurs at B where AD2 and AS1 are equal in the short.

However, in the long run the economy moves to point A because in the long run the economy operates at full employment level.At this point AS,AD and LRAS must be equal.Equilibrium is restored at A.