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

Question

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

Quizplus · Accepted Answer

If the economy starts at point A and moves to point D, it will experience a recessionary gap with high levels of unemployment and low inflation. As a result, aggregate demand would increase and move from point A to point C where there is a higher level of output and employment. In the long run, the economy will reach its potential level of output at point B with no inflationary or recessionary gaps, but it will still operate at a lower level than it could. Therefore, the best choice is C, as the economy will move to point C in the short run and then potentially move to point B in the long run.