When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as _____ fall(s) and the _____ aggregate _____ curve shifts to the _____.
A) nominal wages; long-run; supply; left
B) the aggregate price level; long-run; supply; left
C) nominal wages; short-run; supply; right
D) the aggregate price level; short-run; demand; right

Question

Quizplus · Accepted Answer

When the economy is to the left of the long-run aggregate supply curve, it means that actual output is less than potential output. Over time, nominal wages adjust downwards, making production cheaper. This leads to an increase in the quantity of goods and services supplied at every price level, which is represented by a rightward shift of the short-run aggregate supply curve, moving the economy towards its potential output.

When the Economy Is on the Short-Run Aggregate Supply Curve