Exhibit 14-5

-Refer to the graph in the exhibit.Suppose the economy is in equilibrium, where AD = SRAS.How will the price level be affected, assuming no monetary action is taken?
A) Prices will increase.
B) Prices will decrease.
C) Prices will remain as they are indefinitely.
D) Prices will likely go into negative territory.

Question

Exhibit 14-5
 
-Refer to the graph in the exhibit.Suppose the economy is in equilibrium, where AD = SRAS.How will the price level be affected, assuming no monetary action is taken?  
A) Prices will increase. 
B) Prices will decrease. 
C) Prices will remain as they are indefinitely. 
D) Prices will likely go into negative territory.

Quizplus · Accepted Answer

When the economy is in equilibrium where Aggregate Demand (AD) equals Short-Run Aggregate Supply (SRAS), and assuming no monetary action is taken, any shift in either AD or SRAS away from this equilibrium point can lead to changes in the price level. Typically, an increase in AD or a decrease in SRAS (due to factors like increased costs) while at equilibrium will lead to higher prices, as demand outstrips supply or the cost of production increases, respectively.

Exhibit 14-5 -Refer to the Graph in the Exhibit.Suppose the Economy Is