FIGURE 29-3
-Refer to Figure 29-3.Suppose the economy is at E₁ and that there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at ,the economy will tend towards a new long-run equilibrium characterized by a(n)

Question

FIGURE 29-3 -Refer to Figure 29-3.Suppose the economy is at E<sub>1</sub> and that there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at ,the economy will tend towards a new long-run equilibrium characterized by a(n) A) lower price level and GDP below the potential level. B) higher price level and GDP below the potential level. C) unchanged price level and GDP at the potential level. D) lower price level and GDP at the potential level. E) higher price level and GDP above the potential level.

FIGURE 29-3
-Refer to Figure 29-3.Suppose the economy is at E₁ and that there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at

,the economy will tend towards a new long-run equilibrium characterized by a(n)

Quizplus · Accepted Answer

At the initial equilibrium point E₁, the economy is producing output below its potential level and the price level is higher than the long-run equilibrium. The lack of policy response from the Bank of Canada will allow the economy to adjust towards the new long-run equilibrium through a decrease in the price level and a decrease in real GDP. Therefore, the economy will tend towards a new equilibrium point with a lower price level and real GDP at the potential level. Choice D is the only option that describes this situation.

FIGURE 29-3 -Refer to Figure 29-3.Suppose the Economy Is at E1 and E1

FIGURE 29-3 -Refer to Figure 29-3.Suppose the Economy Is at E₁ and E₁