Figure 18-1

-Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the basic 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 no policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

In the short-run, the economy is in equilibrium where the AD curve intersects the AS curve. If the equilibrium is above potential GDP, then the AS curve is relatively flat and the economy is producing at a level of output greater than its potential. Therefore, if no policy is pursued, the AS curve will shift upwards to the left and the new equilibrium will be at a lower level of output but still above potential GDP, which is depicted by a movement from point C to point D.

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