Figure 16-1
-Refer to Figure 16-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.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 no policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

Quizplus · Accepted Answer

If the economy is in short-run equilibrium above potential GDP, then output must be greater than the natural level of output (Yn). This means that aggregate demand (AD) is greater than aggregate supply (AS) at the potential level of output. In the static AD-AS model, this is depicted as a point to the right of the intersection of AD and AS at potential GDP. Moving from this point to point C, which is the long-run equilibrium, means that there will be a decrease in aggregate demand and/or an increase in aggregate supply. No policy is pursued, so this adjustment will happen through market forces such as price adjustment or changes in expectations of future prices.

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