Starting from long-run equilibrium, a decrease in autonomous investment results in ________ output in the short run and ________ output in the long run.
A)higher; higher
B)higher; potential
C)lower; potential
D)lower; higher

Question

Quizplus · Accepted Answer

A decrease in autonomous investment is an example of an exogenous decrease in spending, which shifts aggregate demand left and decreases the short-run equilibrium. As a result of this recessionary gap, inflation will gradually decrease, thereby shifting the SRAS line downward. When inflation has fallen enough, the economy is back in long-run equilibrium at potential output.

Starting from Long-Run Equilibrium, a Decrease in Autonomous Investment Results