Figure 16-1
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.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 no policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

In the short-run equilibrium above potential GDP, there is a higher level of output than the economy can sustain in the long-run. This implies that there are excess demand pressures in the economy, which will ultimately result in higher inflation. Therefore, in the AD-AS model, the movement from the initial equilibrium point C to the long-run equilibrium point B is the necessary adjustment to bring the economy back to its potential output level, eliminate excess demand, and stabilize the price level.

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