Refer to the diagram and assume that prices and wages are ﬂexible both upward and downward in the economy. In the extended AD-AS model,
A) demand-pull inﬂation would involve a rightward shift of curve A, followed by a rightward shift of curve C.
B) cost-push inﬂation would involve a rightward shift of curve A, followed by a leftward shift of curve C.
C) recession would involve a leftward shift of curve A, followed by leftward shifts of curves C and D.
D) recession could be caused by either a leftward shift of curve A or a leftward shift of curve C.

Question

Refer to the diagram and assume that prices and wages are ﬂexible both upward and downward in the economy. In the extended AD-AS model,
A) demand-pull inﬂation would involve a rightward shift of curve A, followed by a rightward shift of curve C. 
B) cost-push inﬂation would involve a rightward shift of curve A, followed by a leftward shift of curve C. 
C) recession would involve a leftward shift of curve A, followed by leftward shifts of curves C and D. 
D) recession could be caused by either a leftward shift of curve A or a leftward shift of curve C.

Quizplus · Accepted Answer

A recession can be caused by either a leftward shift of curve A (a decrease in aggregate demand) or a leftward shift of curve C (a decrease in aggregate supply due to factors such as increases in input prices). In either case, the result is a decrease in real GDP and an increase in unemployment. The leftward shifts of curves C and D would also occur in a recession caused by a leftward shift of curve A, as the decrease in aggregate demand leads to a decrease in both output and prices.

Refer to the Diagram and Assume That Prices and Wages