35 36 Panel b LRAS Price level LRAS SRAS SRAS SRAS2 AD2 AD A

#35
#36

Panel (b) LRAS Price level LRAS SRAS SRAS SRAS2 AD2 AD, AD, Real GDP Real GDP 35. (Figure: Policy Alternatives) Assume that the economy depicted in panel (a) is in sho rt- run equilibrium with AD1 and SRAS?. If the economy is left to correct itself A) real interest rates will fall which will shift SRAS rightward B) lower wages will result in a gradual shift from SRASI to SRAS2 C) long-run equilibrium will be established at Yp and Ps. D) the aggregate demand curve will shift le 36. As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price leveland the equilibrium real output A) rises, decreases B) rises; increases C) falls; decreases D) falls; increases

Solution

35. The correct answer should be B as this is a deflationery gap. The correct answer is B.

36. The correct answer is A.