Refer to the ﬁgure. Assuming this market is representative of the economy as a whole, this economy
A) is highly susceptible to inﬂation.
B) faces ﬂuctuating output levels whenever there is a demand shock.
C) is capable of always producing at its optimal capacity.
D) is largely immune to business cycles.

Question

Refer to the ﬁgure. Assuming this market is representative of the economy as a whole, this economy
A) is highly susceptible to inﬂation. 
B) faces ﬂuctuating output levels whenever there is a demand shock. 
C) is capable of always producing at its optimal capacity. 
D) is largely immune to business cycles.

Quizplus · Accepted Answer

The figure shows a vertical short-run aggregate supply (SRAS) curve and a downward sloping aggregate demand (AD) curve intersecting at point E, which represents the economy's equilibrium output and price level. A demand shock would shift the AD curve, causing the output level to fluctuate around this equilibrium point, indicating that the economy is not capable of always producing at its optimal capacity. The vertical SRAS curve implies that changes in aggregate demand will primarily affect the price level rather than output level, suggesting that the economy is not immune to business cycles either. While the figure does not provide enough information to determine the susceptibility to inflation, the presence of a vertical SRAS curve suggests that the economy may be vulnerable to cost-push inflation. Therefore, option B is the best choice.

Refer to the ﬁGure