FIGURE 24-5

-Refer to Figure 24-5.Following a positive demand shock that takes the economy from E0 to E1,the movement of the economy from E1 to E2 indicates that
A)a demand shock can keep real GDP above potential output permanently.
B)an increase in the price level causes the AS curve to shift to the left.
C)an increase in the price level causes the AD curve to shift to the left.
D)the economy cannot return to potential output without government intervention.
E)the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Question

FIGURE 24-5

-Refer to Figure 24-5.Following a positive demand shock that takes the economy from E0 to E1,the movement of the economy from E1 to E2 indicates that
A)a demand shock can keep real GDP above potential output permanently. 
B)an increase in the price level causes the AS curve to shift to the left. 
C)an increase in the price level causes the AD curve to shift to the left. 
D)the economy cannot return to potential output without government intervention. 
E)the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Quizplus · Accepted Answer

The movement of the economy from E1 to E2 indicates that as wages and prices adjust to higher output and demand, the AS curve shifts to the left, causing a decrease in real GDP and a movement back towards potential output. This is a long-run adjustment, indicating that the output effect of a demand shock will be reversed over time as the economy returns to its natural level of potential output.

FIGURE 24-5 -Refer to Figure 24-5.Following a Positive Demand Shock That Takes