In the self-correcting AD-AS model, the economy's short-run equilibrium position is indicated by the intersection of which two curves?
A) short-run aggregate supply and long-run aggregate supply
B) short-run aggregate supply and aggregate demand
C) long-run aggregate supply and aggregate demand
D) long-run aggregate demand and short-run personal consumption expenditures curve

Question

Quizplus · Accepted Answer

The self-correcting AD-AS model assumes that in the short run, the economy's equilibrium point is the intersection of the aggregate demand and short-run aggregate supply curves. This is because in the short run, prices are sticky and do not adjust immediately to changes in supply and demand, leading to temporary imbalances between the two. However, in the long run, prices are fully flexible and the economy will adjust to its potential output level, indicated by the intersection of the aggregate demand and long-run aggregate supply curves.

In the Self-Correcting AD-AS Model, the Economy's Short-Run Equilibrium Position