Figure 16-1
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

Question

Figure 16-1 
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

In the basic AD-AS model, short-run equilibrium is where the AD curve intersects the SRAS curve. If the economy is in short-run equilibrium above potential GDP, it means that the actual price level is higher than the expected price level, leading to firms decreasing production, causing the SRAS curve to shift leftward. This would lead to a new short-run equilibrium at a lower level of output and a higher price level, where the AD curve intersects the new SRAS curve. Automatic stabilizers, such as decreased government spending or increased taxation, would reduce aggregate demand which shifts the AD curve leftward, leading to a movement from point C to point B, which is the new long-run equilibrium where AD intersects the LRAS.

Figure 16-1 -Refer to Figure 16-1.Suppose the Economy Is in Short-Run Equilibrium