Refer to the figure below. In response to gradually falling inflation, this economy will eventually move from its short-run equilibrium to its long-run equilibrium. Graphically, this would be seen as
A) Aggregate demand shifting rightward
B) Aggregate demand shifting leftward
C) Short-run aggregate supply shifting downward
D) long-run aggregate supply shifting leftward

Question

Refer to the figure below. In response to gradually falling inflation, this economy will eventually move from its short-run equilibrium to its long-run equilibrium. Graphically, this would be seen as 
A) Aggregate demand shifting rightward 
B) Aggregate demand shifting leftward 
C) Short-run aggregate supply shifting downward 
D) long-run aggregate supply shifting leftward

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