Consider an AD/AS model in long-run equilibrium.An output gap,caused by a leftward shift of the AD curve,will be eliminated if
A)wages rise quickly.
B)the AS curve shifts upward.
C)wages and other factor prices fall sufficiently.
D)real national income decreases.
E)prices rise quickly.

Question

Quizplus · Accepted Answer

In long-run equilibrium, the economy is operating at the natural level of output, where the AD and AS intersect at the potential GDP. If there is a leftward shift of the AD curve, causing an output gap, the economy is producing below the potential GDP. To eliminate the output gap and return to the natural level of output, factor prices (including wages) need to adjust downwards to lower the input costs for firms. This will shift the AS curve to the right, increasing output and reducing prices until the economy returns to potential GDP. Alternatively, prices could rise quickly, but that wouldn't eliminate the output gap, as prices would be rising while output remains below potential. Real national income decreasing wouldn't help either as it would deepen the output gap.

Consider an AD/AS Model in Long-Run Equilibrium