Refer to Exhibit 14-2.The economy moves from point 1 to 2 to 3 to 4 to 5 to 6 to 7.Is this consistent with one-shot declines originating on the supply-side of the economy combined with continued increases in aggregate demand?

Question

Quizplus · Accepted Answer

The path from points 1 to 7, with the economy experiencing both supply-side declines and continued increases in aggregate demand, is consistent with a scenario where supply-side shocks cause initial price increases and output reductions (moving from 1 to 2), followed by periods of both increasing prices and output (moving through points 3, 4, 5, 6, to 7) due to the continued increases in aggregate demand. This pattern reflects both inflationary pressures and recovering output, aligning with the effects of supply-side declines combined with rising demand.