Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
A)Output will increase.
B)Prices will decline.
C)Unemployment will decline.
D)Short-run aggregate supply will shift to the left.

Question

Quizplus · Accepted Answer

The automatic mechanism that will adjust the economy back to potential GDP is the decrease in aggregate demand due to the rising prices that would result from the excess output. This decrease in aggregate demand will lead to a leftward shift in the short-run aggregate supply curve, ultimately bringing the economy back to potential GDP. Thus, the correct choice is D, as none of the other options will occur due to the automatic adjustment mechanism.

Suppose the Economy Is at a Short-Run Equilibrium GDP That