Consider the AD/AS macro model.A permanent demand shock that causes equilibrium output to rise above potential output will
A)allow a stable expansion of real income over time.
B)always reverse itself.
C)be negated in the long run,through the economy's adjustment process.
D)result in a price level lower than that preceding the demand shock.
E)set off an endless cycle of price rises and increases in unemployment.

Question

Quizplus · Accepted Answer

In the long run, the economy will adjust through the self-correcting mechanisms of the AD/AS model such as changes in wages, prices, and interest rates, resulting in a return to potential output and a negation of the demand shock. Therefore, the economy will not experience an endless cycle of price rises and increases in unemployment, nor will it always reverse itself or result in a lower price level than before the shock. The AD/AS model assumes a flexible price level, which allows for these adjustments to occur in the long run.

Consider the AD/AS Macro Model