Figure 15-3

-Refer to Figure 15-3.Suppose the economy is at point A.If investment spending increases in the economy,where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D

Question

Figure 15-3
 
-Refer to Figure 15-3.Suppose the economy is at point A.If investment spending increases in the economy,where will the eventual long-run equilibrium be?
A) A 
B) B 
C) C 
D) D

Quizplus · Accepted Answer

If investment spending increases in the economy, the short-term effect is an increase in aggregate demand (AD) from AD1 to AD2. This will lead to an increase in the price level from P1 to P2, and real GDP from Y1 to Y2. In the long term, wages and prices will adjust, and the SRAS curve will shift leftward until the economy reaches the new long-run equilibrium at point C, where AD2 intersects the LRAS curve. At this point, the price level will be higher than initially at P3, but real GDP will be the same as initially at Y1. Therefore, the eventual long-run equilibrium will be at point C.

Figure 15-3 -Refer to Figure 15-3.Suppose the Economy Is at Point A.If