Figure 16-1
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising.If contractionary policy is used to move the economy back to long run equilibrium,this would be depicted as a movement from ________ using the basic AD-AS model in the figure above.

Question

Figure 16-1 
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising.If contractionary policy is used to move the economy back to long run equilibrium,this would be depicted as a movement from ________ using the basic AD-AS model in the figure above.

Quizplus · Accepted Answer

If the economy is in short-run equilibrium above potential GDP and wages and prices are rising, then the AD curve must be to the right of the long-run AS curve. To move the economy back to long-run equilibrium, contractionary policy should be used, which would shift the AD curve to the left. This movement would be from point C to point B in the figure above.

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