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 leftward
B) Short-run aggregate supply shifting upward
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 leftward 
B) Short-run aggregate supply shifting upward 
C) Short-run aggregate supply shifting downward 
D) long-run aggregate supply shifting leftward

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 this 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.

Refer to the Figure Below