Figure 34-2. Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. -Refer to Figure 34-2.The appearance of the long-run aggregate-supply (LRAS)curve A)is inconsistent with the concept of monetary neutrality. B)is consistent with the idea that point A represents a long-run equilibrium but not a short-run equilibrium when the relevant short-run aggregate-supply curve is AS₁. C)indicates that Y₁ is the natural rate of output. D)All of the above are correct.

Question

Quizplus · Accepted Answer

The LRAS curve appears vertical at the natural rate of output (Y₁), indicating that in the long run, changes in the money supply or aggregate demand will only impact the price level, not output. This supports the concept of monetary neutrality, and indicates that Y₁ is the long-run equilibrium output level. Choice A is incorrect because the LRAS curve's appearance supports the concept of monetary neutrality, not inconsistency. Choice B is also incorrect because point A represents a short-run equilibrium, not a long-run equilibrium, since the aggregate demand and supply curves intersect at that point.

Figure 34-2. Suppose That Banks Are Less Able to Raise Funds and Raise