Figure 11.2 shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. A leftward shift of the short-run aggregate supply curve would return the economy to potential output at:

A) point e''.
B) point e.
C) point e*.
D) a point higher than e''.
E) a point between e'' and e*.

Question

Figure 11.2 shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. A leftward shift of the short-run aggregate supply curve would return the economy to potential output at:

A) point e''. 
B) point e. 
C) point e*. 
D) a point higher than e''. 
E) a point between e'' and e*.

Quizplus · Accepted Answer

A leftward shift in the short-run aggregate supply curve implies a decrease in the economy's ability to produce goods and services. As a result, the equilibrium will move from e' to a point along the aggregate demand curve where it intersects the new aggregate supply curve. This intersection point would be at a lower level of real GDP and a higher price level, which is represented by point e''.

Figure 112 Shows the Relationship Between the Price Level and Real