Use the figure below to answer the following question(s). Figure 10-5
Given the aggregate demand and aggregate supply conditions depicted in Figure 10-5, which of the following is the most likely occurrence?
A) an increase in resource prices that will stimulate aggregate demand and direct the economy to long-run equilibrium
B) a decrease in resource prices that will reduce costs and shift SRAS to the right, directing the economy to long-run equilibrium
C) a continuation of this price level and output in the long run
D) a shift in LRAS to the left as the result of an increase in the expected inflation rate

Question

Use the figure below to answer the following question(s). Figure 10-5
 Given the aggregate demand and aggregate supply conditions depicted in Figure 10-5, which of the following is the most likely occurrence?
A) an increase in resource prices that will stimulate aggregate demand and direct the economy to long-run equilibrium 
B) a decrease in resource prices that will reduce costs and shift SRAS to the right, directing the economy to long-run equilibrium 
C) a continuation of this price level and output in the long run 
D) a shift in LRAS to the left as the result of an increase in the expected inflation rate

Quizplus · Accepted Answer

The intersection of AD and SRAS (point A) is above the LRAS, indicating that the economy is producing above the potential output in the short run. To reach the long-run equilibrium, aggregate supply needs to shift to the right. A decrease in resource prices would reduce the costs of production and increase profit margins, incentivizing firms to increase output and shift the SRAS curve to the right, eventually reaching the LRAS and long-run equilibrium at point B with lower price level and higher output. None of the other options address this situation.

Use the Figure Below to Answer the Following Question(s)