The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
FIGURE 24-3
-Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.The initial effect is
A)a recessionary output gap of 100.
B)a recessionary output gap of 300.
C)a recessionary output gap of 550.
D)an inflationary output gap of 200.
E)an inflationary output gap of 100.

Question

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.The initial effect is
A)a recessionary output gap of 100. 
B)a recessionary output gap of 300. 
C)a recessionary output gap of 550. 
D)an inflationary output gap of 200. 
E)an inflationary output gap of 100.

Quizplus · Accepted Answer

The negative shock to the economy shifts the AD curve to the left, from AD1 to AD2. This results in a decrease in aggregate demand, which leads to a recessionary output gap. The output gap is the difference between actual output and potential output. In this case, the output gap is 100, which means that actual output is 100 units below potential output.

The Diagram Below Shows an AD/AS Model for a Hypothetical