Refer to the figure above. Suppose the economy is operating in a recession such as point B. If policymakers allow the economy to adjust to the long-run natural rate on its own, people will
A) reduce their price expectations and the short-run aggregate supply will shift right.
B) raise their price expectations and aggregate demand will shift left.
C) raise their price expectations and the short-run aggregate supply will shift left.
D) reduce their price expectations and aggregate demand will shift right.

Question

Quizplus · Accepted Answer

In a recession, if the economy is left to adjust on its own, people will eventually reduce their price expectations due to lower demand and excess supply, leading to a rightward shift in the short-run aggregate supply curve as costs decrease.

Refer to the Figure Above