Refer to the following figure to answer the next questions.

-Based on the figure, if the economy is at point F, then in the long run, we can expect
A) the price level to increase and output to increase.
B) the price level to decrease and output to increase.
C) the long-run aggregate supply curve to shift to the left.
D) aggregate demand to increase.
E) aggregate demand to decrease.

Question

Refer to the following figure to answer the next questions.
 
-Based on the figure, if the economy is at point F, then in the long run, we can expect
A) the price level to increase and output to increase. 
B) the price level to decrease and output to increase. 
C) the long-run aggregate supply curve to shift to the left. 
D) aggregate demand to increase. 
E) aggregate demand to decrease.

Quizplus · Accepted Answer

Point F is below potential output (Yp) and to the right of the long-run aggregate supply (LRAS) curve, indicating that there is an output gap. In the long run, firms will increase their production to close the output gap, which will result in an increase in output. However, because the economy is initially below potential output, there is downward pressure on prices. As firms increase their production, they may face diminishing returns or higher input costs, which could lead to higher prices over time. Therefore, we can expect the price level to decrease initially and then potentially increase in the long run as the economy approaches potential output.

Refer to the Following Figure to Answer the Next Questions