In the AD-AS model,stagflation does not persist,because the working of the self-correcting mechanism of the economy ___________ the level of output and ___________ the price level until the economy eventually returns to a long-run equilibrium state,where actual output ___________ potential output.

Question

Quizplus · Accepted Answer

In the AD-AS model, the self-correcting mechanism of the economy leads to a decrease in output and a decrease in the price level in the short run, as shown by a leftward shift in the AD curve. This eventually leads to an increase in output and a decrease in the price level, as shown by a rightward shift in the AS curve, until the economy returns to a long-run equilibrium state where actual output equals potential output. Therefore, the best choice is D, where the self-correcting mechanism leads to an increase in output and a decrease in the price level until the economy eventually returns to a long-run equilibrium state, where actual output equals potential output.

In the AD-AS Model,stagflation Does Not Persist,because the Working of the Self-Correcting