FIGURE 24-5 -Refer to Figure 24-5.Following a positive demand shock that takes the economy from E₀ to E₁,the movement of the economy from E₁ to E₂ indicates that A)a demand shock can keep real GDP above potential output permanently. B)an increase in the price level causes the AS curve to shift to the left. C)an increase in the price level causes the AD curve to shift to the left. D)the economy cannot return to potential output without government intervention. E)the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Question

Quizplus · Accepted Answer

The movement of the economy from E₁ to E₂ indicates that the initial output effect of the demand shock is being reversed in the long run, as the AS curve shifts to the left and the equilibrium point moves back towards potential output. This is due to wage and price adjustments in response to the initial demand shock, which eventually bring the economy back towards its long-run equilibrium level of potential output. Therefore, choice E is the best answer. Choices A, B, C, and D are incorrect because they do not accurately describe the movement of the economy shown in the diagram or the effects of a demand shock in the long run.

FIGURE 24-5 -Refer to Figure 24-5.Following a Positive Demand Shock That Takes