The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion.
TABLE 24-1
-Refer to Table 24-1.Consider Economy E.Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy?
A)The AD curve has shifted to the right and the economy is in a short-run disequilibrium position.
B)The AS curve has shifted to the left and the economy is in a short-run disequilibrium position.
C)The intersection of the AD and AS curves is to the right of Y*.
D)The intersection of the AD and AS curves is to the left of Y*.
E)The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

Question

The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion.
  TABLE 24-1
-Refer to Table 24-1.Consider Economy E.Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy?
A)The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. 
B)The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. 
C)The intersection of the AD and AS curves is to the right of Y*. 
D)The intersection of the AD and AS curves is to the left of Y*. 
E)The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

Quizplus · Accepted Answer

Potential output for each economy is $340 billion. In Economy E, the actual output is $380 billion, which is above potential output. This means that the intersection of the AD and AS curves is to the right of Y*, indicating an inflationary gap. There is excess demand in the short run, which will lead to an increase in prices and a shift to the left in the AS curve until it intersects with the AD curve at potential output. Therefore, the correct choice is C, which states that the intersection of the AD and AS curves is to the right of Y*.

The Table Below Shows Data for Five Economies of Similar