Refer to the figure below._____ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ____ to long-run equilibrium at point ____.
A) Rising; A; C
B) Falling; A; C
C) Rising; A
D) Falling; B: C

Question

Refer to the figure below._____ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ____ to long-run equilibrium at point ____. 
A) Rising; A; C 
B) Falling; A; C 
C) Rising; A 
D) Falling; B: C

Quizplus · Accepted Answer

This economy has a short-term equilibrium at point A, which is where AD and SRAS. Because the actual level output is lower than potential output, as indicated by the LRAS line, the economy is experiencing a recessionary gap and firms are not selling as much as they would like to. Eventually, this low level of aggregate demand will cause the inflation rate to fall. This is shown graphically as the SRAS line moving downwards until it intersects the AD curve at point C in the figure. At that point, which is the long-term equilibrium, actual output equals potential output and the inflation rate stabilizes at this lower level.

Refer to the Figure Below