Figure 16-1
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Question

Figure 16-1 
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

Short-run equilibrium above potential GDP means that the economy is producing above its long-run potential, which creates upward pressure on prices. Automatic stabilizers such as increased taxes and reduced government spending are designed to counteract this pressure and bring the economy back to its long-run equilibrium. In the static AD-AS model, this is depicted as a movement from point C (short-run equilibrium above potential GDP) to point B (long-run equilibrium) as the aggregate supply curve shifts to the left to reflect the increase in taxes and decrease in government spending.

Figure 16-1 -Refer to Figure 16-1.Suppose the Economy Is in Short-Run Equilibrium