FIGURE 24-5 Refer to Figure 24-5.Following a positive demand shock that takes the economy from E₀ to E₁,the movement of the economy from E₁ to E₂ indicates that A)a demand shock can keep real GDP above potential output permanently. B)an increase in the price level causes the AS curve to shift to the left. C)an increase in the price level causes the AD curve to shift to the left. D)the economy cannot return to potential output without government intervention. E)the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Question

Quizplus · Accepted Answer

The movement from E₁ to E₂ indicates a temporary increase in real GDP above potential output due to the positive demand shock. However, in the long run, the economy will return to potential output as wages and prices adjust. This is known as the output effect of a demand shock, and it is indicated by the shift of the AS curve back to its original position. Therefore, Choice E is the best choice.