Use the following to answer questions:
Figure: AD-AS Model I
-(Figure: AD-AS Model I) Refer to Figure: AD-AS Model I. If the economy is at point X, nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium.
A) fall; aggregate demand; left
B) rise; aggregate demand; right
C) fall; short-run aggregate supply; right
D) fall; short-run aggregate supply; left

Question

Use the following to answer questions:
Figure: AD-AS Model I 
-(Figure: AD-AS Model I) Refer to Figure: AD-AS Model I. If the economy is at point X, nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium.
A) fall; aggregate demand; left 
B) rise; aggregate demand; right 
C) fall; short-run aggregate supply; right 
D) fall; short-run aggregate supply; left

Quizplus · Accepted Answer

When the economy is at point X, it is beyond the long-run equilibrium, indicating an overheated economy. In such a scenario, nominal wages eventually fall as the economy adjusts, leading to a decrease in production costs. This decrease in production costs makes it cheaper for firms to produce goods and services, thereby increasing the quantity of goods and services that firms are willing to supply at any given price level. As a result, the short-run aggregate supply (SRAS) curve shifts to the right until the economy reaches its long-run equilibrium.

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