Figure 14-1
-Refer to the Figure 14-1.If the economy starts at A and there is a fall in aggregate demand,what happens to the economy in the long run?
A) It moves to D and then back to A.
B) It moves to B and then to C.
C) It moves to D and then to C.
D) It moves to B and then back to A.

Question

Figure 14-1  
-Refer to the Figure 14-1.If the economy starts at A and there is a fall in aggregate demand,what happens to the economy in the long run?
A) It moves to D and then back to A. 
B) It moves to B and then to C. 
C) It moves to D and then to C. 
D) It moves to B and then back to A.

Quizplus · Accepted Answer

If aggregate demand falls, the economy will initially move from point A to point D in the short run, with a lower level of output and higher unemployment. However, in the long run, wages and prices will adjust downwards, increasing aggregate supply and eventually bringing the economy to point C at full employment.