As a recessionary gap is eliminated through an economy's self-correcting adjustments process,
A) the equilibrium price level increases and the equilibrium real output decreases.
B) the equilibrium price level decreases and the equilibrium real output increases.
C) the equilibrium price level and the equilibrium real output increase.
D) the equilibrium price level and the equilibrium real output decrease.

Question

Quizplus · Accepted Answer

As the recessionary gap is eliminated, the economy moves towards the long-run equilibrium where the aggregate demand curve intersects the long-run aggregate supply curve. This results in a decrease in the equilibrium price level and an increase in the equilibrium real output. This is because the economy adjusts to the decreased demand by lowering prices, which results in an increase in the demand for goods and services and an increase in production.

As a Recessionary Gap Is Eliminated Through an Economy's Self-Correcting