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) Rising; B; C
C) Falling; A; C
D) Falling; A; B

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) Rising; B; C 
C) Falling; A; C 
D) Falling; A; B

Quizplus · Accepted Answer

This economy is in a short-term equilibrium at point A, which is where AD and SRAS. Because the actual level output is higher than potential output, as indicated by the LRAS line, the economy is experiencing an expansionary gap. As firms respond to high demand by raising their prices more rapidly than their costs are rising, the rate of inflation starts to rise. Graphically, an expansionary gap would cause the SRAS line to move upward 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 higher level.

Refer to the Figure Below