An important assumption in the AD/AS macro model is that when real GDP is less than potential output,factor prices adjust and the
A)AS curve shifts to the left fairly rapidly.
B)AS curve shifts to the right only very slowly.
C)AS curve shifts to the right very rapidly.
D)AD curve shifts to the left rapidly.
E)None of the above - the AS curve remains unchanged.

Question

Quizplus · Accepted Answer

The assumption is that when real GDP is less than potential output (i.e. there is a recessionary gap), factor prices will adjust (e.g. wages and other input costs will decrease) causing the AS curve to shift to the right. However, this adjustment process can take time and is not immediate, so the AS curve shifts slowly.

An Important Assumption in the AD/AS Macro Model Is That