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. Following the negative AD shock shown in the diagram (from AD1 to AD2), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
A)110; 1000
B)60; 1000
C)90; 900
D)110; 800
E)90; 1250

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. Following the negative AD shock shown in the diagram (from AD1 to AD2), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
A)110; 1000 
B)60; 1000 
C)90; 900 
D)110; 800 
E)90; 1250

Quizplus · Accepted Answer

In the long-run, the economy adjusts to its potential output level, which is the level of real GDP that the economy was at before the negative AD shock. The adjustment process involves changes in prices and wages that move the economy back to its natural level of output. Since the question implies a return to long-run equilibrium following a negative AD shock, the correct answer is the one that maintains the original level of real GDP (1000) but at a lower price level (60) due to the negative demand shock, which is option B.

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