Suppose government does NOT intervene in the economy.How would an expansionary gap be closed in the long run?
A) by a rightward shift of the short-run aggregate supply curve
B) by a leftward shift of the short-run aggregate supply curve
C) by a movement to the right along a fixed short-run aggregate supply curve
D) by a movement to the left along a fixed short-run aggregate supply curve

Question

Suppose government does NOT intervene in the economy.How would an expansionary gap be closed in the long run?  
A) by a rightward shift of the short-run aggregate supply curve 
B) by a leftward shift of the short-run aggregate supply curve 
C) by a movement to the right along a fixed short-run aggregate supply curve 
D) by a movement to the left along a fixed short-run aggregate supply curve

Quizplus · Accepted Answer

In the absence of government intervention, an expansionary gap would lead to upward pressure on prices and wages. This would cause a leftward shift in the short-run aggregate supply curve as firms' costs increase, leading to a decrease in output and closing the expansionary gap in the long run.

Suppose Government Does NOT Intervene in the Economy