The figure below shows short-run equilibrium in an aggregate demand-aggregate supply model. If the economy is currently producing Y₁ level of output, long-run equilibrium will be established if: A) the short-run aggregate supply curve shifts to the right to remove the expansionary gap. B) the short-run aggregate supply curve shifts to the left to remove the expansionary gap. C) the short-run aggregate supply curve shifts to the left to remove the recessionary gap. D) the short-run aggregate supply curve shifts to the right to remove the recessionary gap. E) there is a leftward shift of the aggregate demand curve.

Question

Quizplus · Accepted Answer

Long-run equilibrium occurs when the economy produces at its potential output level (Yp), which is determined by the economy's factors of production and technology. In the figure, Y₁ is above Yp, indicating a recessionary gap. To reach long-run equilibrium, the short-run aggregate supply curve must shift to the right (SRAS2) to increase output and decrease prices until the economy is producing at Yp. Therefore, the correct answer is D, as the short-run aggregate supply curve must shift to the right to remove the recessionary gap and reach long-run equilibrium.

The Figure Below Shows Short-Run Equilibrium in an Aggregate Demand-Aggregate