Exhibit 16-4
-If the economy in Exhibit 16-4 is initially at point c and aggregate demand is stable,the economy will
A) move toward point a
B) move toward point b
C) stay at point c
D) move toward point d
E) move toward point f

Question

Exhibit 16-4 
-If the economy in Exhibit 16-4 is initially at point c and aggregate demand is stable,the economy will
A) move toward point a 
B) move toward point b 
C) stay at point c 
D) move toward point d 
E) move toward point f

Quizplus · Accepted Answer

If aggregate demand is stable and there are no external shocks, the economy will remain at point c in the short run. This is because point c represents both short-run equilibrium and potential output. This is true because the aggregate demand curve intersects the short-run aggregate supply curve at point c, which determines the level of output and price level in the economy. Therefore, if aggregate demand does not change, there will be no reason for the economy to move away from point c.

Exhibit 16-4 -If the Economy in Exhibit 16-4 Is Initially at Point