Figure 18-1

-Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Question

Figure 18-1
 
-Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

Since the economy is initially in short-run equilibrium above potential GDP, the AD curve intersects the AS curve to the right of the potential GDP level. When automatic stabilizers move the economy back to long-run equilibrium, the AS curve will shift to the right until it intersects the LRAS curve at potential GDP level. The new equilibrium point will be at point B, as it represents the intersection of the LRAS and AD curves. Therefore, the movement is from point C to B.

Figure 18-1 -Refer to Figure 18-1.Suppose the Economy Is in Short-Run Equilibrium