The graph shown displays various economic outcomes. If the economy is currently at equilibrium B, and the government does nothing, then eventually: A) SRAS will shift to the right, and the economy will have Y ₃ output with lower prices. B) SRAS will shift to the left, and the economy will experience stagflation. C) LRAS will shift to the left until equilibrium is reached. D) AD will shift to the right, restoring long-run equilibrium.

Question

Quizplus · Accepted Answer

At equilibrium B, the economy is producing at potential output (Yp) with stable prices. If the government does nothing, over time, factors of production will become more productive, and technology advances will occur, resulting in the shift of the SRAS curve to the right. As a result, the economy will produce at a higher level of output (Y1) with lower prices (P1). Eventually, the economy will reach a new long-run equilibrium at B0, with potential output (Yp) and lower prices (P1). Thus, choice A is the correct answer.

The Graph Shown Displays Various Economic Outcomes