If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, under flexible exchange rates, then the long-run equilibrium position
A) can be attained if labor adjusts its wages downward due to prices being lower than Expected.
B) can be attained by a decrease in government spending.
C) can be attained by contracting the money supply.
D) cannot be attained without a change in technology.

Question

Quizplus · Accepted Answer

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, then the economy is in a recessionary gap. In the long-run, wages will adjust downwards due to prices being lower than expected, which will shift the short-run aggregate supply curve to the right, ultimately reaching the long-run equilibrium position. This adjustment process is facilitated by flexible exchange rates. Therefore, choice A is the correct answer.

If the AD Curve Intersects the Short-Run Aggregate Supply Curve