The exhibit given below shows the short-run aggregate demand and supply curves i

Question

The exhibit given below shows the short-run aggregate demand and supply curves in an economy, AD1 and AS1, 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 AD1 to AD2. Which of the following is true in this case?

The economy will move from point C to point B in the short run and then eventually to point A.

The economy will move from point D to point A in the short run and then to point C in the long run.

The economy will move from point B to point A in the short run and then to point C in the long run.

The economy will move from point D to point C in the long run.

Explanation / Answer

The correct answer is:

a) The economy will move from point C to point B in the short run and then eventually to point A.

RReason: Due to a sudden decrease in Aggregate demand from AD1 to AD2, the economy moves to a new equilibrium to point B in the short tun where AD2 and AS1 intersect. Eventually, supply adjusts and supply curve AS1 Shifts rightward to AS2 to restore an equilibrium at point A in the long run.

Thanks!

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