Figure 14-1
-Refer to Figure 14-1. If the economy starts at A and moves to D, what happens to the economy in the long run?
A) It moves to C and then to A.
B) It moves to B and then to A.
C) It moves to C.
D) It moves to A.

Question

Figure 14-1 
-Refer to Figure 14-1. If the economy starts at A and moves to D, what happens to the economy in the long run?
A) It moves to C and then to A. 
B) It moves to B and then to A. 
C) It moves to C. 
D) It moves to A.

Quizplus · Accepted Answer

When the economy moves from A to D, it is experiencing an inflationary gap, where aggregate demand is greater than aggregate supply. In the long run, this will lead to producers increasing their production to meet the higher demand, which will shift the short-run aggregate supply curve to the right (from SRAS1 to SRAS2). This will eventually bring the economy back to the long-run equilibrium, where the economy operates at potential GDP (point C). Therefore, the answer is C.

Figure 14-1 -Refer to Figure 14-1. If the Economy Starts at a Starts