In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run potential, the economy will experience
A) declining real wages and interest rates that will stimulate employment and real output.
B) rising interest rates that will stimulate aggregate demand and restore full employment.
C) a budget surplus that will stimulate demand and, thereby, help restore full employment.
D) rising real wages and real interest rates that will restore equilibrium at a higher price level.

Question

Quizplus · Accepted Answer

When the output of an economy is less than its long-run potential, there is a surplus of labor and goods, leading to declining real wages and prices. This, in turn, leads to lower interest rates, which stimulates borrowing and investment, increasing output and employment. Therefore, option A is the correct choice. Options B, C, and D do not accurately reflect the situation described in the question.

In the Aggregate Demand/aggregate Supply Model, When the Output of an Economy