Refer to the figure given below. In the above figure, AD₁ and AS₁ represent the original aggregate demand and aggregate supply curves, respectively.AD₂ and AS₂ show the new aggregate demand and aggregate supply curves.At the original equilibrium price and quantity, this economy is experiencing: A)inflation. B)economic growth. C)full employment. D)less than full-capacity output.

Question

Quizplus · Accepted Answer

At the original equilibrium price and quantity, the economy is producing below full-capacity output as aggregate demand is less than aggregate supply. This is indicated by the intersection of AD₁ and AS₁ to the left of the potential GDP line. The shift in both curves to their right results in a new equilibrium point at a higher price level and higher quantity which still remains below full-capacity output. Therefore, there is no inflation or economic growth, and full employment is not achieved.

Refer to the Figure Given Below